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Persistent inflation weighs on US stocks

A new inflationary shock has hammered stock and bond prices again, heightening investor fears that the Federal Reserve will be forced to take more drastic measures to bring soaring consumer prices under control.

The declines hit across the board, with rising interest rate expectations heightening concerns that the economy could slip into a recession. The Dow Jones Industrial Average fell 880 points, or 2.7%, to 31,392.79. Tech stocks slid along with banks and consumer stocks, sending the S&P 500 down 116.96 points, or 2.9%, to 3900.86, and the Nasdaq Composite falling 414.20 points, or 3 .5%, to 11340.02. All three indexes fell for a second straight week.

Investors also dumped US Treasuries, driving the yield on the two-year note – which tends to climb with investors’ expectations of higher interest rates – to its all-time high in addition to a decade.

The moves came after new data dashed investors’ hopes that easing supply chain bottlenecks and rising borrowing costs could help precipitate a relatively rapid decline in the inflation over the summer without the Fed needing to signal more aggressive than expected interest rate hikes.

Prior to Friday, various market metrics had indicated that investors expected the Fed to raise its benchmark short-term interest rate target by half a percentage point next week and into July. After the report, investors expected another such hike in September, and speculation of a three-quarters percentage point hike as early as next week — a milestone the Fed hadn’t taken since 1994 — was renewed on Wall Street.

“Given the high level of uncertainty about the Fed’s interest rate hike path, it’s hard to beat the table and say buy stocks,” said Erik Knutzen, chief investment officer of multi-strategies. -active at Neuberger Berman.

Although inflation concerns have rattled markets all year, the possibility of it easing has led to some tentative signs of stability in recent weeks. However, any semblance of calm was shattered when the Labor Department said the consumer price index rose at the fastest year-on-year pace since 1981.

Where in the US household budget is inflation hitting the hardest? The WSJ’s Jon Hilsenrath traces the roots of rising prices to understand why some sectors have risen much more than others. Photo illustration: Laura Kammermann/WSJ

Much of this gain was due to soaring food and energy prices related to the war in Ukraine. But even excluding these volatile categories, so-called core inflation rose 0.6% from the previous month. It was above the consensus estimate of a 0.5% increase and particularly disheartening for investors given that it showed strong inflationary pressures that could survive temporary supply disruptions.

“Most people thought inflation peaked a few months ago, and now the fact that we’ve even gone up means people have to readjust, including the Fed,” said senior portfolio manager John Madziyire. at Vanguard.

Expectations of higher interest rates were evident in the bond market. The yield on the benchmark two-year note climbed to 3.047% from 2.815% on Thursday, its biggest one-day gain since 2009 and its highest close since 2007. Yields rise when bond prices fall.

Adding fuel to Friday’s moves, the University of Michigan reported that an index of consumer sentiment fell in June to its lowest point since the survey began in the late 1940s. expect consumer prices to rise 3.3% annually over the next five to 10 years, up from 3% the previous month, according to this survey.

Economists generally believe that consumer inflation expectations can fuel actual inflation. Signs that these expectations are on the rise could provide officials with an “out” from their current 50s. [basis point] guidance,” allowing them to raise rates by 0.75 percentage points next week, Jefferies analysts wrote in a note to clients.

Despite declining confidence, consumers continued to spend at a rapid pace, contributing to inflation but also supporting corporate earnings. Recent data has also continued to show a tight labor market – with the number of openings far outpacing the number of people looking for work – a testament to the strength of the economy but also the efforts the Fed could make. have to do to bring it more into balance.

For investors, the ideal scenario is a so-called soft landing, in which the Fed cools the economy just enough to lower inflation without causing a recession. Heading into Friday, hopes for that outcome had helped lift stocks from recent lows. Bond yields, after rising all year, had also found a range, reflecting bets that they were already accounting for future Fed rate hikes.

Bond and stock prices have often moved in opposite directions recently, with investors feeling more comfortable turning to Treasuries as a safe haven when stock prices have fallen. Mr Madziyire said this partly reflected the calculation that falling stock prices themselves could hurt economic growth, reducing the need for central bank officials to drive up Treasury yields, which serve as a benchmark for borrowing costs across the economy. That relationship, however, broke down again on Friday, giving investors little place to hide.

Stocks fell overall as all 11 S&P 500 sectors ended in the red. DocuSign shares fell $21.43, or 25%, to $65.93 after the e-signature software developer said its growth slowed in the first quarter and it cut hiring plans . Stitch Fix fell $1.44, or 19%, to $6.34 after the personal styling service said it was cutting around 330 jobs as it faced a slowdown in consumer spending and a increasing losses.

Investors have crowded into companies selling the everyday goods that consumers stock in their pantries. J. M. Smucker,

maker of Jif peanut butter and Smucker’s jam, ended up gaining $1.16, or 0.9%, to $128.41.

“It’s not that demand is softening or falling off a cliff; it just changes the way consumers spend their money,” said Tim Chubb, chief investment officer at Girard Advisory Services in Pennsylvania.

Adding pressure to consumers’ wallets: Inflation data suggests energy prices jumped 34.6% from a year earlier, while the cost of groceries rose by 11.9% over the year. Analysts worry that a prolonged increase in mainstream products, such as milk, bread and eggs, could push consumers to adjust their consumption habits, further worsening the economic climate.

“We think the market will be a bit more convinced that the peaks in core prices are behind us and will fade significantly,” said Edward Smith, co-chief investment officer at the UK investment firm. Rathbone Investment Management.

Shoppers also shifted their spending away from casual wear and homewares that were in demand at the height of the pandemic. Some traders mark down excess products, which worries investors about margins and the strength of future consumers.

“These things are really creating a lot of inventory situations at retailers,” said Jason Pride, chief investment officer of Private Wealth at Glenmede. His company added exposure to short-term bonds.

In energy markets, Brent crude, the international benchmark for oil prices, fell $1.06, or 0.9%, to $122.01 a barrel. Disruptions in global oil markets caused by the war in Ukraine and subsequent sanctions imposed on Russia are expected to keep oil prices high. Oil prices generally drive gasoline costs.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, rose 0.7%.

Traders worked on the floor of the New York Stock Exchange on Thursday.


Photo:

Courtney Crow/Associated Press

Write to Sam Goldfarb at sam.goldfarb@wsj.com, Hardika Singh at hardika.singh@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

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Post expires at 11:00pm on Wednesday June 22nd, 2022