European Inflation Jumps While China PMI Improves

(Friday Market Open) Stock futures opened slightly lower after a historically bad first half and second quarter ahead of the long Independence Day weekend. Next week, it’s on to June unemployment and the latest signals on earnings season.

Potential Market Movers

With ISM Manufacturing PMI expected after the opening bell, investors opened the third quarter with a mild premarket sell-off as inflation and rate-hike concerns continue.

After finishing its worst first half since 1970, S&P 500 futures were down 0.27% just before the market open, Dow Jones futures lost 0.31%, and Nasdaq futures moved 0.34% lower.

European markets suffered after the euro area’s annual inflation rose to a new record high of 8.6% for June, above May’s 8.1% increase and ahead of an 8.4% forecast. It’s likely to fuel the European Central Bank’s first rate hike in 11 years later this month. All major European indexes were lower at midday.

Oil prices shot up before the open, with WTI crude oil gaining 2.496% to $108.37 per barrel.

Out of China, there was some good news this morning with the Caixin China General Manufacturing PMI climbing to 51.7 in June from 48.1 in May, topping market forecasts of 50.1. The latest number was the first factory activity expansion since February and the fastest pace since May 2021 as COVID-19 lockdown and control measures ease in Asia.

The 10-year Treasury yield remained under 3% before the open, while the Cboe Market Volatility Index (VIX) stayed just above 28 premarket.

Among today’s premarket movers in equities:

• GM GM was up 0.25% in premarket trading after reaffirming guidance but adding that chip shortages are affecting customer deliveries.

• Kohl’s KSS lost nearly 18% before the open after confirming reports that it ended discussions to be bought by Franchise Group (FRG). The Milwaukee-area retailer indicated fast-weakening retail conditions precluded the deal and added that it cut its quarterly outlook accordingly.

• Micron MU lost 4.6% after reporting a better-than-consensus profit but a lower-than-expected sales outlook to weakening demand for semiconductor products.

• Apple AAPL lost 0.98% after J.P. Morgan Securities gave the computer giant an overweight rating on its stock, which placed a December price target of $200 on the company.

• Meta Platforms META lost 0.64% after the company cut hiring plans and CEO Mark Zuckerberg told employees in a meeting covered by Reuters that the economy is facing “one of the worst downturns we’ve seen in recent history.”

Reviewing the Market Minutes

As expected, the S&P 500 (SPX) secured its worst first-half sell-off in more than 50 years by Thursday’s close, but investors seemed more focused on how incoming slowing consumer and business spending data and global economic news might drive markets and the upcoming Q2 earnings season in July.

Yesterday, the S&P’s broad index finished the stressful month of June still in a bear market and down nearly 21% from its all-time high in January. Finishing at 3,785.38, the SPX lost 0.88% during the session. For the three months, the index fell more than 16%, its biggest single-quarter fall since March 2020.

The Dow Jones Industrial Average ($DJI) lost nearly 600 points after the open to recover by day’s end with a 250-point deficit equal to a loss of 0.82%. The Nasdaq composite ($COMP) gave up 1.33% during the session and remains down 32% from its all-time high in November.

The safe haven of government securities kept the 10-year Treasury note yield below 3% yesterday, tumbling 12.1 basis points to 2.972%. The close followed Wednesday’s 11.3-basis-point drop that took the bellwether below 3% for the first time in a month. The Cboe Market Volatility Index (VIX) settled just beneath 29 by the close.

It was a June Swoon to remember, even considering 2020’s pandemic volatility when the S&P 500 last overnighted in bear market territory for little over a month right as the lockdowns hit. Though the pandemic continues, circumstances clearly changed in first-half 2022 with late February’s start to the Russia-Ukraine war.

Since then, investors have dealt with a level of geopolitical and economic instability well beyond what COVID-19 introduced to the equity, energy, and bond markets two years ago.

Thursday’s data provided fresh, if not exactly heartening, information on inflation, jobs, and the potential for recession, particularly if 2022’s Q2’s productivity numbers follow the downward path of Q1.

Before the open, the government announced the Federal Reserve’s favorite inflation metric, the Core Personal Consumption Expenditure (PCE) Price Index. In May, core PCE rose 4.7% on a year-to-year basis, slightly beneath expectations but still at a multi-decade high. Most analysts believe that yesterday’s data won’t do much to dissuade the Fed from a projected 75-basis-point hike at its July 27 meeting, but the central bank will have more data to consider, including June’s Consumer Price Index (CPI) numbers scheduled for July 13.

The government also said U.S. Personal Spending also rose a slight 0.2% month-over-month in May, the weakest gain of the year, after a downwardly revised 0.6% in April.

And, initial jobless claims, a key layoff indicator, declined to a seasonally adjusted 231,000 last week from a revised 233,000 the week before. The numbers indicate that the labor market’s still tight but that the hiring boom may not be as strong as it’s been in recent months.

All the slowdown news put energy in the crosshairs. WTI crude oil lost 3.7% in yesterday’s trading to finish at $105.76 per barrel, while natural gas futures fell 16% in Thursday’s trading. Traders fear that slower consumer and business spending will lead to oversupply in the energy markets in the coming months. In utilities news, the Supreme Court on Thursday limited the Environmental Protection Agency’s authority to set standards on climate-changing greenhouse gas emissions for existing power plants.

U.S. investors aren’t the only ones surviving a bad two quarters—European stocks closed their worst first half since 2008. In yesterday’s trading, Germany’s DAX finished off 1.69%, Britain’s FTSE lost 1.96%, and France’s CAC retreated 1.80%. The STOXX Europe 600 finished down 1.5% as investors feared European banks may feel compelled to raise rates more aggressively as consumers are struggling with higher energy and commodity costs affected by Russian sanctions.  

Stocks making news in Thursday’s trading:

• Walgreens Boots Alliance WBA finished down 7.27% after reporting quarterly earnings and sales ahead of estimates and reiterated its forecast for adjusted earnings per share in the low-single digits. Earlier this week, the company halted its plans to sell its U.K.-based Boots drugstore chain, and its shares are down more than 25% for the year.

• RH RH, the home goods retailer also known as Restoration Hardware, lost 10.53% after lowering its full-year guidance, blaming higher interest rates for slower sales.

• Pfizer PFE gained 3.1% after announcing a $3.2 billion deal with the U.S. government to provide additional doses of the COVID-19 vaccine.

CHART OF THE DAY: GDP WATCH. Late Thursday, the Atlanta Fed’s GDPNow tool reset to a reading of -1.0, down from its 0.3 reading on June 27. It plans to do another update later today. A look at the central bank branch’s latest forecast components reveals that inventory adjustments are weighing heavily on the current picture while consumer spending (PCE) remains relatively healthy. The advance estimate of Q2 gross domestic product (GDP) is expected on July 28. Chart source: Federal Reserve Bank of Atlanta. 

Three Things to Watch

Crypto’s Bad Month: June was the month that kept on giving. Pioneering cryptocurrency bitcoin lost 38% of its value last month and fell below $19,000 during Thursday’s trading. Digital currency companies have weathered weeks of bad news following the collapse of U.S. dollar-pegged stablecoin UST in May. That event not only shook the value of a number of cryptocurrencies but the businesses around them. By yesterday’s close, Coinbase (COIN) lost 5.49% and Riot Blockchain (RIOT) lost nearly 7%.

Shorting Out? The latest J.D. Power U.S. Initial Quality Study gives electric vehicle (EV) manufacturers a weak signal. Noting that manufacturing quality has declined across all automotive products since supply chain and staff disruptions during COVID-19, the consumer research and analytics company reported Wednesday that EV owners cited 39% more problems with their new vehicles than owners of cars with combustion engines. Across the entire auto industry, the firm reported that problems per 100 vehicles rose 11% this year for an average of 180 problems each. EV and PHEV (plug-in hybrid electric vehicle) owners reported about 240 problems per 100 vehicles compared with 175 problems per 100 vehicles for cars with combustion engines.

Medical Debt and Credit: As rising rates and borrowing challenges are worrying many consumers, one group may be getting a long-awaited break on their credit histories starting today. The three major credit bureaus—TransUnion, Equifax, and Experian—are now required by law to remove cleared medical debts from consumer credit reports, a move that could help some better qualify for future credit. Previously, paid-off medical debt in amounts as small as $500 or less could remain on a credit report for seven years. A 2019 study in the Journal of Public Health found that 66.5% of bankruptcies in the United States were related to medical issues.

Notable Calendar Items 

July 4: Markets closed for Independence Day

July 5: Factory Orders

July 6: JOLTS job openings report, ISM Services Index, and S&P U.S. Services PMI

July 7: ADP National Employment Report, Challenger job cut survey, and earnings from Seven & I Holdings SVNDY, Levi Straus LEVI, and WD-40 WDFC

July 8: June unemployment/nonfarm payrolls and May consumer credit

July 12: Earnings from PepsiCo PEP, Nordic Semiconductor NDCVF, and AAR Corp. AIR

July 13: June CPI and earnings from Progressive PGR and Fastenal FAST

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.