4:15pm: Inflation woes drive investor pessimism
The Dow ended Friday down 880 points, 2.7%, at 31,393, the Nasdaq tumbled 414 points, 3.5%, to 11,340, and the S&P 500 slipped 117 points, 2.9%, to 3,901.
All 30 Dow components closed in the red, meaning the benchmark has lost ground in 10 of the last 11 weeks.
Apple Inc (NASDAQ:AAPL) stock dropped almost 4%, Microsoft Corporation (NASDAQ:MSFT) shares fell 4.5% and Amazon.com Inc (NASDAQ:AMZN) lost 5.6%.
Following the news this morning that the US’ headline inflation rate reached a 41-year high in May, the University of Michigan’s latest consumer sentiment index had revealed that this measure sunk to 50.2 in the preliminary June survey – the lowest level recorded since the survey began in the 70s.
“It just reinforces the impact the CPI number had on consumer psyche," said Peter Boockvar of Bleakley Advisory Group, as reported by CNBC. "We can guess this is going to have a negative future impact on consumer spending. It’s a shocking number but this is what inflation does when it’s running as hot as it is."
12.05pm: High inflation, low consumer sentiment hit Wall Street
US stocks continued to fall at noon as high inflation and low consumer sentiment have encouraged a sell-off.
At midday, the Dow had shed 758 points or 2.4% at 31,514 points.
The S&P 500 had dipped 107 points or 2.7% at 3,911 points and the Nasdaq had sunk 391 points or 3.3% at 11,363 points.
Following the news this morning that the US’ headline inflation rate reached a 41-year high in May, the University of Michigan’s latest consumer sentiment index had revealed that this measure sunk to 50.2 in the preliminary June survey – the lowest level recorded since the survey began in the 70s.
Consumer sentiment was down 14% from the 58.4 recorded in May, falling well below the market expectation of 58.1.
ING chief international economist James Knightley said the survey results suggest that households are really fearing stagflation.
“The damage was done in the household finances due to the squeeze on spending power from higher inflation – just 30.8% of households think income growth will outpace inflation over the next five years,” he said.
He noted there was growing pessimism about people’s expectations for how comfortable their retirement would be which was presumably reflecting the poor equity market performance in the year to date.
“Interestingly, the survey suggests people are not especially worried by higher interest rates. It is the higher gasoline price story that is doing the real damage,” Knightley said.
City Index and FOREX.com market analyst Fawad Razaqzada said with consumer sentiment deteriorating, and inflation and interest rates on the rise, investors were left with little choice but to sell equities and hold cash.
“Against such economic indicators, there is a risk we will see a sharp rise in interest rate projections from Fed officials next week, which could hurt risk assets even further,” Razaqzada said.
“Keep your belts tightened, as volatility is going to remain very high, for a long time.”
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9.35am: US stocks open lower
Wall Street was a sea of red at the open on Friday following the release of the latest US inflation data which showed the CPI in May reached a 41-year high.
Just after the open, the Dow Jones Industrial Average had shed 503 points at 31,770 points, while the S&P 500 was down 65 points at 3,953 points, and the Nasdaq Composite dropped 223 points at 11,531 points.
Pantheon Macroeconomics chief economist Ian Shepherdson said the CPI data report killed any last vestiges of hope that the Fed could pivot to a 25 basis points interest rate hike in July.
“But we remain hopeful for September, on the grounds that the next two core CPI prints will be lower than May’s; the three jobs reports will show that wage gains continue to moderate; and because by the time of the September meeting, the housing meltdown will have everyone’s attention, and continuing to hike by 50 basis points will look gratuitous,” Shepherdson said.
ING chief international economist James Knightley noted that demand continued to outpace the supply capacity of the US economy, with supply factors showing little sign of near-term improvement.
“The onus is on the Fed to dampen the demand side of the equation with ongoing rate hikes,” he said.
8.45am: Market reacts to hotter-than-expected inflation data
US stock futures plummeted on Friday morning after new data from the Bureau of Labor Statistics revealed that the US consumer price index (CPI) hit a 41-year high in May.
Futures for the Dow, S&P, and Nasdaq fell 0.7%, 0.8% and 1% respectively shortly after the release of the data.
The US CPI in May accelerated to 8.6% amid surging energy and food prices, coming in hotter than the 8.3% increase predicted by economists surveyed by the Wall Street Journal.
It is the highest CPI jump since December of 1981.
AvaTrade chief market analyst Naeem Aslam said the inflation engine was running steaming hot and there was still plenty more to come.
“Traders and investors are concerned as recession odds are only increasing with every day passing,” Aslam said.
“Higher inflation has become an emotional matter now for consumers as it has started to seriously erode their disposable income. Consumers are constantly being pushed into a corner, and higher inflation is making them make difficult choices.”
He noted that in terms of gold, price action has become more intriguing.
“On one hand, gold acts as an inflation hedge, but at the same time, the main denominator is the dollar index,” Aslam said.
“Higher inflation means more hawkish monetary policy by the Fed and this is the focus among precious metal traders.”
6.30am: Caution the word
US markets were expected to open little changed on Friday ahead of a key inflation report, which will likely show sustained price pressures during the month of May and influence the outcome of the Federal Reserve’s policy meeting next week.
Analysts are expecting the main consumer price index (CPI) to stabilize around last month’s level of 8.3% and core CPI, which excludes food and energy prices, at 5.9%. Rising fuel prices and global supply-chain disruptions are likely to have kept the CPI reading elevated, they said.
Futures for the Dow Jones Industrial Average fell 0.2% in pre-market trading, while those for the broader S&P 500 index lost 0.1%, and contracts for the Nasdaq-100 were up 0.2%.
US stocks were battered yesterday, with the S&P 500 losing up to 2.4%, as the US 10-year yield consolidated above the 3.05 mark. The US dollar index, meanwhile, climbed above the 103 level.
Swissquote Bank senior analyst Ipek Ozkardeskaya said the highly anticipated inflation report could provide a negative surprise as the positive pressure on food and energy prices and the unexpected uptick in second-hand car prices in May meant inflation is unlikely to have eased for a second consecutive month.
“A stronger-than-expected inflation figure would revive the Federal Reserve hawks, and eventually push the S&P 500 below the 4,000 mark before the weekly closing bell. A softer inflation read on the other hand, would resuscitate hope that inflation has peaked two months ago, and the worst is behind,” she added.
Ozkardeskaya said energy prices will need to soften in order for inflation to continue stabilizing even as US crude topped $123 per barrel this week.
“Oil markets probably have more downside risk in the short-term, with another wave of China slowdown fears capping the upside,” said Jeffrey Halley, senior market analyst at Asia Pacific OANDA.
But he added that losses will be limited given the physical tightness of both crude and refined products globally.
In energy markets, WTI crude oil futures gained 0.52% to $122.14 a barrel and Brent crude futures added 0.62% to $123.83.
Contact the author at jon.hopkins@proactiveinvestors.com