This morning, the Consumer Price Index (CPI) was released, and it showed that inflation is still running very strong. Specifically, consumer prices rose 9.1% year over year in June, which was hotter than expected. Excluding volatile food and gas prices, inflation was up 5.9% year over year. On a month-to-month basis, prices surged 1.3%, which was also above the consensus expectation. This suggests that the Fed will need to continue raising interest rates aggressively to combat inflation. The data spooked the equity markets, and the futures, which were up earlier this morning, sold off sharply and are now presaging a weak opening for stocks stateside.
Yesterday, market breadth was slightly negative, as decliners outpaced advancers by a 1.2-to-1.0 ratio. All 11 sectors were in the red yesterday, but energy stocks were among the weakest. Investors were clearly worried about the inflation data, and those concerns came to fruition this morning.
On a positive note, Dow-30 component Boeing (BA) recorded a strong day of trading yesterday after reporting that it delivered 51 planes in June, representing a multi-year high. Conversely, software companies Salesforce (CRM) and Microsoft (MSFT) dropped in price as fears increased about a recession, causing customers to switch to projects with quicker payback.
In commodity news, crude oil prices declined yesterday (and are in the red again this morning), as worries increased about an oversupply condition in the wake of recessionary fears and a coronavirus resurgence in China. Meanwhile, U.S. Treasury bond yields were mostly higher yesterday, and some long-term yields remain inverted, which usually portends a recession. In currency news, the Euro and U.S. Dollar achieved parity for the first time in decades, suggesting tougher translation rates for companies with operations there. The CBOE Volatility Index (VIX), which measures the magnitude of price movements in the S&P 500, rose yesterday as demand for options protection increased. A further increase in the VIX is likely today.
Looking ahead, several important economic releases are slated for the days ahead, including initial jobless claims and the Producer Price Index (PPI) on Thursday. The Fed will likely use the latter report as a key indicator on future inflation expectations. Additionally, retail sales in June and the University of Michigan Consumer Sentiment for July will be released on Friday. Elsewhere, earnings season will start, and several large financial institutions will be on the docket in the coming days. Overall, we think that most eyes will be on the PPI data and the reports from the banking giants, which should drive trading in the coming days.
– John E. Seibert III
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
