Stock futures are indicating a negative open for today.
This morning, the U.S. Bureau of Labor Statistics released its Consumer Price Index (CPI) data for the month of May. The all-in CPI growth figure was 8.6%, year over year, versus economists’ expectations of 8.3% and the 8.3% rate of expansion reported in April. Core CPI, excluding food and energy, came in at 6.0%, compared to the consensus economic experts’ inflation estimate of 5.9% and the prior-month rate of 6.2%. The data was not as good as what Wall Street was anticipating.
Inflation still remains at a high rate level. Next week, the Federal Reserve will meet and, most surely, review the latest CPI figures before deciding on the magnitude of a probable increase in short-term interest rates. In recent times, Fed officials have been suggesting that one-half-percentage-point hikes would be appropriate this month and in July.
At 10:00 a.m. EDT today, the University of Michigan will release its preliminary measure of consumer confidence for the first week of June. More specifically, its Consumer Sentiment Index is expected to read 59.0, up slightly from 58.4 in the previous week. Consumers have had a gloomy opinion of the economy, but their spending remains elevated. Investors continue to be wary.
Over the past few weeks, the major market indexes had been trading in a relatively narrow range. Investors did not fully commit to selling or buying equities en masse. They were likely waiting for the latest CPI data.
Late in Thursday’s trading, concerns about the pending inflationary readings caused the Dow Jones Industrial Average to slide 1.9%, the Standard & Poor’s 500 to decline 2.4%, and NASDAQ to fall 2.7% for the day.
All 11 major market sectors lost ground, with consumer staples displaying the most resilience. Decliners outnumbered advancers by a factor greater than 10. Most visibly, tech giant Apple (AAPL) was down 3.6%, energy company Occidental Petroleum (OXY) dropped 5.4%, utility Constellation Energy (CEG) slipped 5.5%, financial services provider Bank of America (BAC) was off 3.9%, and cruise line operator Carnival (CCL) gave back 9.3% in share price. Bucking the negative trend were integrated device manufacturer NXP Semiconductors (NXPI), discount retailer Dollar General (DG), agricultural market provisioner Tractor Supply (TSCO), and big-box retailer Costco Wholesale (COST), up 4.0%, 1.7%, 1.7%, and 0.9%, respectively.
Investors will probably look to the upcoming Federal Reserve meeting before making any further adjustments to their portfolios. Considering the central bank’s recent guidance, we don’t expect any surprises in rate setting policy. That said, investors will listen closely for any Fed discussion about future rate actions. After next month, the Fed will take a break and then meet in September. New inflation data will largely influence the Fed’s strategic plan at summer’s end.
In the meantime, consumers, dealing with higher inflation, are rejiggering their spending. Fuel and food price pressures are especially keen. Consumers are shifting preferences away from premium name-brand basic items (e.g., grocery products) toward budget store-brand offerings. In the aftermath of COVID-19, they are also allocating more money for travel, leisure, and entertainment, instead of durable goods. Concurrently, a number of businesses, particularly those dependent on consumer product demand, are pulling back on expansion plans. The same is true for some other commercial enterprises feeling the impact of higher materials, components, logistics, and wage expenses.
On balance, in the months ahead, the economy and the stock market likely will remain under stress. Investors should focus on top-quality equities. We note that only utility, energy, and healthcare issues are generally trading above their 200-day moving averages.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
