Stocks dip in advance of inflation report
Stocks dropped before Wednesday’s inflation report, with the Treasury curve inversion deepening to levels last seen in 2007 amid fears that aggressive rate hikes will sink the economy into a recession.
The S&P 500 slid into the close as megacap tech sold off and energy shares joined a plunge in oil. The yield on the 10-year U.S. note dropped as much as 12 basis points below the two-year rate. So-called inversions of the curve are a potential harbinger of an economic contraction.
Economists say inflation continued to heat up in June, hitting a pandemic peak that will keep the Federal Reserve geared for another big hike. The consumer price index probably rose 8.8 percent from a year earlier, the largest jump since 1981, according to the median forecast in a Bloomberg survey.
“The market is showing nervousness as to what this is going to look like,” said Patrick Kaser, portfolio manager at Brandywine Global. “There’s been talk about commodity prices coming down, but we’re not really seeing that flow through yet. We’re still expecting this number to come in pretty high.”
Traders also kept a close eye on the dollar, which fluctuated after hitting the highest since the COVID-19 panic of March 2020.
The impacts of the U.S. currency surge will also be highly scrutinized during the earnings season. PepsiCo, one of the first major industry players to report second-quarter results, said demand remained robust despite inflation — but highlighted foreign-exchange translation headwinds.
“In the current environment, dollar strength is a sign of investors’ worries about a global recession since it signals a flight to the relative safety of the world’s reserve currency,” wrote Nicholas Colas, co-founder of DataTrek Research. “Until the dollar starts to weaken, it is difficult to believe the lows are in for U.S. equities in 2022.”
In other corporate news, American Airlines Group rallied as the carrier stuck with its expectation for a jump in secondquarter sales, highlighting the strength of travel demand. Amazon’s Prime Day sale is luring bargain hunters looking to stock up on pantry items and cheap electronics despite a dearth of deals.
Trading revenue at the five biggest Wall Street banks likely climbed 16 percent to $27.8 billion in the second quarter, according to analyst estimates compiled by Bloomberg. That surge would come as a result of market swings spurred by recession fears, soaring inflation and global turmoil.
Sam Zell, the billionaire made famous by his real estate deals, said that central bank actions to flood the market with money in recent years are coming back to bite the economy.