The futures market started in the green yesterday, recovering slightly from a very weak day of trading. They remained in the green overnight before briefly slipping into the red ahead of the Producer Pricing Index release. That data showed that producer prices increased 8.7% year over year in August, or 7.3% excluding the volatile food and energy components. After the release, the indices moved slightly into the green, suggesting a positive start to the trading day.
On a month-to-month basis, the producer (wholesale) pricing figures came in around expectations and thus we did not get the market shock that yesterday’s consumer pricing data produced. Indeed, stock prices fell after inflationary data was released, showing consumer prices increased 8.6% in August, while core prices, which exclude the energy and food components, were up 6.3% on a 12-month basis. Traders quickly surmised that the U.S. Federal Reserve would likely be hawkish for longer than prior estimates. This caused traders to move out of stocks across the board, though higher Beta stocks were hit the hardest, and the market suffered its worst one-day loss since June 2020. Overall, the Dow Jones Industrial Average was off 1276 points; the S&P 500 was down 178 points; and the NASDAQ tumbled 633 points.
Market breadth was very negative yesterday, as decliners outpaced advancers by a 7.6-to-1.0 ratio. Only about 1% of S&P 500 companies were in the green at the end of the session. Energy stocks were among the strongest performers yesterday, though only relatively, and communication issues were among the weakest, with technology equities not too far behind.
In commodity news, oil prices fell yesterday in the early portion of the trading session, as fears about an economic slowdown increased. However, the price rebounded when a report stated that the Biden Administration would look to fill the strategic oil reserve at around $80 per barrel, possibly putting a floor under the price. Elsewhere, U.S. Treasury bond yields largely rose, as traders priced in additional rate hikes in the quarters ahead. Much of the market had been pricing in a 75-basis point hike at the September meeting. Though a majority still believes that will be the case, a growing minority believes that a 100-basis point hike is possible. The VIX Volatility Index, which measures the magnitude of price movements in the S&P 500, jumped as traders bought options protection.
Several economic reports will be released in the days ahead. These include initial jobless claims as well as the Philadelphia and Empire State manufacturing indexes on Thursday, followed by the University of Michigan Consumer Sentiment Index on Friday. Additionally, a few dozen companies will report earnings in the days ahead. Overall, we think most eyes will be on any inflation data over the rest of this week.
− John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
