Trading on Tuesday started quite positively following an extremely weak session on Monday, as traders thought the move lower provided an entry opportunity. The early-morning move tapered off through the late-morning hours as several Fed regional governors gave remarks that the central bank appears likely to “front-load” interest-rate hikes. The indices fell into the red, and all three major averages eventually reached new 52-week lows. Still, traders saw this as an opportunity as well, and bought stocks into the market close, allowing the S&P 500 and NASDAQ Composite to finish in the green. Overall, the S&P finished up 10 points, while the NASDAQ closed higher by 114 points. The Dow Jones Industrial Average, however, was off 85 points, dragged lower by a poor performance in a few key constituents such as IBM (IBM).The futures continued to trend higher throughout the evening and early morning hours ahead of the CPI (Consumer Price Index) data released before the opening bell.
At 8:30 A.M. (EST), the Labor Department report showed that core inflation—which excludes the volatile energy and food components—rose 6.2% in April, while the overall inflation figure was up 8.3%. These numbers were hotter than expected and will likely do little to alleviate the Federal Reserve’s concerns about surging prices. When these numbers came out, the futures market sold off sharply, and we are looking at a lower opening to the trading day stateside.
Meantime, despite the positive move in the indices yesterday, market breadth was somewhat weak, as decliners outpaced advancers by a 1.4-to-1.0 ratio. Technology stocks were among the best performers, rebounding after a weak session on Monday. On the other hand, REITs were among the worst performers, hurt by the recent surge in lending rates.
In commodity news, oil prices fell yesterday, as worries about a supply build-up surged, with China’s slowing growth and mandated COVID-19 shutdowns possibly lowering the energy needs of the world’s second-largest economy. Elsewhere, U.S. Treasury bond yields were mixed, as short-term rates rose and long-term ones fell. This yield curve flattening is usually negative for financial companies' earnings, which lend long and borrow short. The VIX Volatility Index, a measure of the magnitude of price movements in the S&P 500, fell as demand for options protection waned.
Looking ahead, several economic reports will be released in the days ahead. These include initial jobless claims and the Producer Price Index on Thursday, while the University of Michigan Consumer Sentiment Index for May will be released on Friday. On the earnings front, several dozen companies will report quarterly performances and outlooks in the days ahead, though the earnings season is well past its apex. Overall, we think traders will start to trade on economic releases in the days ahead.
– John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
