Stock prices deflate on inflation reports

(Friday market close) Stocks sold off sharply after the worrying May inflation report sent the S&P500 (SPX) down 2.91% to its monthly lows near 3,900. If SPX falls to this level, it will be in a full-fledged bear market. Other major indices didn’t hold up much better. The Nasdaq Compound ($COMP) plunged 3.52% and the Dow Jones Industrial Average ($DJI) fell 2.73%.

Behind the chaos was warmer-than-expected consumer price index (CPI) data from May, revealing that inflation had jumped 1% in the previous four weeks, exploding up 0.7 % predicted by analysts and eclipsing April’s 0.3% gain.

Higher inflation spread across all metrics, with increases in gasoline, housing and food leading the way. The CPI energy index rose 3.9% during the month, mainly due to the 4.1% rise in gasoline prices during the month. The house index rose 1.4% and the food index climbed 1.2%. Core inflation, which excludes more volatile elements such as energy and food, nevertheless rose by 0.6% in May against 0.5% expected.

Many analysts were wondering at the close whether the Federal Reserve could bypass next week’s plan for a 50 basis point rate hike and go higher.

Signs of a hoped-for spike in inflation in today’s numbers were nowhere to be found. On an annual basis, inflation rose to 8.6% year-on-year, well above the forecast of 8.3%. Core annual inflation came in at 6% instead of the forecast 5.9%.

With inflation now at another 40-year high, the consumer is feeling real stress as real incomes – inflation-adjusted incomes – fell 3% for the month.

Further evidence came from the University of Michigan’s monthly consumer sentiment survey later in the day. The flagship report slipped to an all-time low in June of 50.2, well below a consensus reading of 59 reported earlier by the the wall street journal.

Digging into the report, the Michigan figures, subject to further revision, reveal that consumers are particularly concerned about the continued rise in inflation. A possible reset in consumer spending could explain why the consumer staples sector remained in the green most of the day. But even consumer staples were not immune to selling through the close and also ended the day in the red.

Business confidence may also erode as Bank Index PHLX KBW plunged 4.34%. A weak consumer and higher borrowing costs are likely to reduce business investment, which translates into lower lending revenues for banks. Of course, we have also seen the housing market start to deteriorate over the past few months. Mortgage applications have fallen in 12 of the past 15 weeks and are around a third of what they were at their peak in February 2021.

The 10-year Treasury yield (TNX) jumped 12 basis points to 3.16%. The 2-year Treasury yield rose 23 basis points to 3.05%. CME tool FedWatch now forecasts a high probability of a 50 basis point hike at next week’s Fed meeting as well as in July, September and November. Rising yields pushed risk assets lower with Russell 2000 (RUT) down 2.73% and S&P 500 Pure Growth Index tumbling 3.95%

The tech sector has been battered from many sides by inflation, a weaker consumer, rising rates and Goldman Sachs (GS) analyst downgrade netflix (NFLX), Roblox (RBLX), and eBay (EBAY) to a seldom-used sell rating. Additionally, the pandemic-related lockdowns just reported in Beijing and Shanghai are likely to hurt tech production.

CHART OF THE DAY: GREAT CYCLE. The S&P GSCI ($SPGSCI—candlesticks) tracks a representative sample of commodities. The S&P 500 (SPX—pink) fell more than 50% the last time commodities hit these levels. Over the past two years, the commodities index has shown some relative strength (green) against the S&P 500. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

SuperCycle

In today’s CPI report, people are again talking about the commodity super cycle. This is a period when commodity prices rise and tend to weigh on economic growth. The last commodity super cycle took place in the 2000s and caused the S&P500 (SPX) to stay below the 1,500 level from 2000 to 2013. Another super cycle took place in the 70s when the S&P 500 traded sideways for almost two decades. Of course, that doesn’t mean the S&P 500 will do the same this time around.

Jeff Currie, global head of commodities research at Goldman Sachs, identified three factors that could fuel a commodity super cycle, including decarbonization or a focus on green energy, deglobalization, and decades easy money policies. Until these issues are addressed, commodity prices are likely to rise and inflation will continue to be a drag.

June 13: Oracle Earnings (ORCL)

June 14: Producer Price Index (PPI)

June 15: Retail sales, FOMC interest rate decision

June 16: Building Permits, Housing Starts, Philadelphia Fed Manufacturing Index and Earnings from Adobe (ADBE), Kroger (KR)

June 21st: Sales of existing houses

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TD Ameritrade® Commentary for educational purposes only. SIPC member.

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