Stocks Slip as Strong CPI Encourages Aggressive Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday close down -0.45%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.67%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.14%. 

U.S. stock indexes Wednesday settled moderately lower, with the S&P 500, Dow Jones Industrials, and the Nasdaq 100 all falling to 1-week lows.  U.S. stock indexes moved sharply lower early Wednesday after a larger-than-expected increase in the U.S. June CPI report reinforced speculation the Fed will continue to raise interest rates aggressively.  However, stocks recovered from their worst levels after T-note yields fell, which sparked short-covering in stock indexes and lent support to technology stocks.

The U.S. June CPI rose +9.1% y/y, stronger than expectations of +8.8% y/y and the largest increase in 41 years.  June CPI ex-food & energy eased to 5.9% y/y from 6.0% y/y in May but was stronger than expectations of 5.7% y/y.

Wednesday’s Fed Beige Book was bearish for stocks.  The Beige Book said that while economic activity "expanded at a modest pace, on balance, since mid-May," several Fed districts "reported growing signs of a slowdown in demand," and some contacts noted "concerns over an increased risk of a recession."  The Beige Book also said price increases remained "substantial" across the U.S. in recent weeks though some areas saw signs that inflation was cooling.

Hawkish comments Wednesday from Atlanta Fed President Bostic were bearish for stocks when he said "everything is in play" for policy action after data showed U.S. consumer prices rose more than expected last month to a fresh four-decade high.

A report from Bank of America released Wednesday forecasted a "mild recession this year" in the U.S., saying service spending is slowing and surging inflation is spurring consumers to pull back spending plans.  The report said, "a number of forces have coincided to slow economic momentum more rapidly than we previously expected."  These include inflation from food and energy prices that are leaving households with less available income for discretionary purchases.

The International Monetary Fund (IMF) cut its U.S. 2022 GDP forecast to 2.3% from last month's estimate of 2.9% and raised its U.S. 2022 jobless rate estimate to 3.7% from 3.2%.

Today’s stock movers…

Financial stocks retreated Wednesday on concern that rising U.S. inflation pressures will force the Fed to keep tightening monetary policy, which raises the odds the U.S. economy will fall into recession.  Principal Financial Group (PFG) closed down by more than -3%. Also, MetLife (MET),  State Street (STT), Truist Financial Corp (TFC), Prudential Financial (PRU), and PNC Financial Services (PNC) closed down by more than -2%. 

Airline stocks fell Wednesday after Delta Air Lines reported Q2 adjusted EPS of $1.44, well below the consensus of $1.64, and said high operating costs would persist through the rest of the year.  Delta Air Lines (DAL) closed down by more than -4%. Also, American Airlines Group (AAL) closed down by more than -3%.  In addition,  Alaska Air Group (ALK) closed down by more than -1%. 

Fastenal (FAST) closed down more than -6% Wednesday to lead losers in the S&P 500 and Nasdaq 100 after its CEO warned of early signs of decelerating demand in the industrial sector.  Other stocks in the sector also fell on the news, with Grainger (GWW) closing down more than -3% and MSC Industrial Direct (MSM) closing down -1%.

Illumina (ILMN) closed down more than -4% Wednesday after Barclays cut its recommendation on the stock to underweight from equal-weight.

Twitter (TWTR) closed up more than +7% Wednesday to lead gainers in the S&P 500 after it sued Elon Musk over his abandoned $44 billion takeover bid.

A decline in T-note yields Wednesday supported gains in technology stocks.  Qualcomm (QCOM) and ASML Holding NV (ASML) closed up more than +2%.  Also, Amazon.com (AMZN), Tesla (TSLA), Advanced Micro Devices (AMD), NXP Semiconductors (NXPI), Marvell Technology (MRVL), and Lam Research (LRCX) closed up more than +1%.

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed up +8.5 ticks, and the 10-year T-note yield fell -6.3 bp to 2.906%.  T-note prices Wednesday recovered from early losses and moved higher.  T-notes Wednesday initially moved lower after U.S. June consumer prices rose at the fastest pace in 41 years.  The surge in price pressures may push the Fed to be even more aggressive in tightening monetary policy.  Fed fund futures have now priced in 150 bp of Fed rate hikes over the next two FOMC meetings.

However, T-notes Wednesday recovered their losses and posted moderate gains on concerns that aggressive Fed rate hikes will spark a recession. Strong demand for the Treasury’s $19 billion auction of reopened 30-year T-bonds also sparked short covering in T-notes. The auction had a bid-to-cover ratio of 2.44, above the 10-auction average of 2.34.  T-notes found additional support Wednesday afternoon when the Fed Beige Book said that several Fed districts "reported growing signs of a slowdown in demand," and some contacts noted "concerns over an increased risk of a recession."

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