Stock Sell-Off Continues, Consumer Inflation Expectations Rise
Last Updated 12:00PM EST
Equities are red halfway into Friday’s trading session. As of 12:00 p.m. EST, The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 2.33%, 2.6%, and 3.27%, respectively. All sectors are negative, with the consumer discretionary sector being the biggest laggard so far, as it is down 3.9%.
Furthermore, prices of WTI crude oil continue to slide, as prices are currently hovering in the mid $119 range. On the other hand, Treasury yields continue to increase on the back of a hot inflation report that suggests inflation has not peaked. As of this writing, the U.S. 10-Year Treasury yield is 3.157%, an increase of 11 basis points.
To add to the negativity, the University of Michigan released its survey on consumer inflation expectations over the next five years. Consumers now expect inflation to be 3.3% compared to 3% from the previous month. This number has been trending up over the past couple of years, now hitting the highest level since July 2008.
It’s also important for investors to note that these expectations were taken before today’s CPI report. It is likely that many consumers were under the impression that inflation had peaked. However, this sentiment will probably change after today, which could lead to higher expectations, going forward.
Stocks Sell Off as CPI Report Misses Expectations
Last Updated 10:00AM EST
The much-anticipated CPI report was released today, which came in worse than expected. The year-over-year headline number was 8.6%, compared to the forecast of 8.3%. The month-over-month print, which helps investors gauge whether or not inflation is accelerating, came in at 1% versus the expected 0.7%.
In addition, core CPI, which strips out volatile categories such as energy and food, increased 6% year-over-year and 0.6% month-over-month. Expectations were 5.9% and 0.5%, respectively.
Today’s inflation report suggests that inflation has not peaked and that the Federal Reserve may have to raise rates significantly above the neutral rate, going forward.
As a result, stocks began the first 30 minutes of Friday’s trading session in negative territory, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 down 1.97%, 2.14%, and 2.55%, respectively.
The consumer discretionary sector (XLY) is the laggard so far, as it is down 2.9%. Conversely, the energy sector (XLE) is in the green, up 0.08%.
Furthermore, crude oil is trading at $121.22 per barrel, a decline of 0.18%, while the U.S. 10-year Treasury yield spiked to 3.11%.
Pre-Market Update
Stock futures were mixed in the early hours of Friday as investors await May’s inflation data with bated breaths.
Futures on the Dow Jones Industrial Average (DJIA) inched down 0.07%, while those on the S&P 500 (SPX) barely scraped through above the flatline with a 0.06% gain, as of 5.16 a.m. EST, Friday. Meanwhile, the Nasdaq 100 (NDX) futures dipped 0.34%.
Slight Possible Hope Later Today
May’s consumer price index (CPI) report is due out before the market opens on Friday. The Dow Jones survey revealed that economists are anticipating an 8.3% increase in the main CPI and 5.9% increase in the core CPI (food and energy prices excluded), year-over-year.
This is important because if the data meets expectations, it will mean slightly lower inflation than in March, and the market can take it as an indication that we might have passed the peak of inflation. This cooler inflation might also lead the Fed to consider toning down its aggressive interest rate hikes.
At the end of Thursday’s regular session, the S&P 500 and Nasdaq Composite fell 2.38% and 2.74% respectively. Moreover, the Dow lost almost 2%. These moves were in anticipation of the May CPI as well.
Gas Prices Are Having Issues of Their Own
Meanwhile, gasoline prices in the U.S. are threatening to touch a record average of $5 a gallon. This persistent uptrend, which has a strong hand in pushing up inflation, is expected to remain high due to the sanctions on Russia.
Importantly, the fuel price surge is starting to cause coherent changes in consumer behavior. Energy consumption has so far been seen as an essential expenditure among households. But this way of thinking is possibly changing. Reportedly, drivers are trying to save on fuel consumption and are only filling up their tanks to a certain dollar amount, and are not going beyond that.
However, power-generation fuel stocks crashed by more than 16% on Thursday following the news of a fire at one of the U.S.A.’s largest liquefied-natural-gas export facilities in Texas. Power in Texas would be shut down for at least three weeks, which cannot be good news.
However, on the flip side, more fuel will be available for domestic consumers like utilities companies and manufacturers. Moreover, traders will be able to hoard some of the fuel for use later in the winter, when fuel prices may peak due to increased demand for heat.
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