The futures market started last night by trending lower after weak trading during the day. However, the futures moved upward and into the green through the night ahead of key inflation data. Traders have recently been pricing in a 75-basis-point hike at the September Federal Reserve meeting, and have been looking for any information to solidify their views. The Consumer Price Index (CPI) showed that prices increased 8.5% year over year in July, or 5.9%, without volatile food and energy prices baked in. This represents a relative cooling of inflationary pressures, which may lead the Fed to raise interest rates less than previously expected. Still, the August CPI data will be released before the Fed's next meeting. Though interest rates fell across the board with this release, the equity futures took another step up, suggesting a strong start to the trading day.
Several reports will likely affect trading later today, including the Minneapolis Fed President Neel Kashkari's remarks in the afternoon. Several large companies, including Dow-component Disney (DIS), report after the bell today.
The stock market indices fell throughout the day yesterday. Worries about semiconductor chip sales pervaded the market, and economic news releases showed that the decline in labor productivity has accelerated after the pandemic, falling 4.6% in the second quarter. Unit labor costs also expanded 10.8% in the quarter. Overall, the indices ended not far from their daily lows, with the S&P 500 down 18 points, the NASDAQ off 151 points, and the Dow Jones Industrial Average declining 58 points. Moreover, market breadth was weak as decliners outpaced advancers by a nearly two-to-one ratio. Energy issues were among the best performers on the day, while consumer discretionary stocks were among the weakest.
In commodity news, oil prices fell slightly yesterday, as traders thought that supply could increase if a new nuclear deal is reached with Iran. Elsewhere, U.S. Treasury bond yields were mixed, with most short-term rates rising and long-term yields falling. There still exists a notable inversion in the two- and 10-year credit spreads, which usually forecasts a recession. The VIX Volatility Index, which measures the magnitude of price movements in the S&P 500, rose a bit, as demand for options protection increased.
Several economic reports will be on the docket in the days ahead. Initial jobless claims and the Producer Price Index data will be released tomorrow. This will give some additional insight into inflationary pressures, given that it takes some time for producer price increases to work through the supply chain. Additionally, the University of Michigan consumer sentiment index will be released on Friday. On the earnings front, several dozen earnings reports will be released in the days ahead, though readers should note that the earnings season is past its apex. Overall, we think that the market will trade on inflation data and interest-rate expectations in the days ahead.
− John E. Seibert III
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
