(Friday Market Open) Thursday’s selloff continued for equity futures on Friday morning as the widely awaited May Consumer Price Index (CPI) numbers came in worse than expected before the open.  

Potential Market Movers

The CPI revealed that inflation in the United States was much hotter than expected as the CPI grew at a staggering 1% in May, well above the 0.7% forecast. Inflation grew at 8.6% year-over-year. Even May’s core inflation came in higher than expected at 0.6% instead of the 0.5% analysts expected.

With inflation now at another 40-year high, the consumer is definitely feeling the pinch as real earnings, or earnings adjusted for inflation, fell 3% for the month.

Analysts who have been predicting we’ve reached peak inflation have been proven wrong and today’s report suggests that the Fed’s plan for combatting inflation isn’t working. Investors are speculating on what the Fed will do next—will it move away from its 50-basis-point hikes for something more aggressive? Today’s developments will likely keep recession talk going.

The S&P 500 futures fell further on the news, tumbling more than 1.3%. Nasdaq futures lost nearly 200 points, dropping 1.4% before the opening bell. The 10-year Treasury yield (TNX) initially rose on the news but as investors started looking for safe havens, things turned negative. However, the 2-year Treasury yield rose nearly one basis point, suggesting that the Fed may become more aggressive. The CBOE Market Volatility Index (VIX) rose above 27.

To make matters worse, Beijing and Shanghai are locking down again as COVID-19 cases rise. The lockdowns could make the inflation picture worse as supply chain problems are likely to continue. Surprisingly, the Shanghai Composite rose 1.42%, but Hong Kong’s Hang Seng fell 0.29%. Sell-offs were happening in other markets as well with the European Stoxx 600 and the Japanese Nikkei sliding 1.5% each.

After Thursday’s close, pandemic favorite DocuSign (DOCU) plunged more than 19% in extended hours after a miss on earnings estimates. DOCU also provided disappointing forward earnings guidance near the range of analysts’ forecasts. 

Reviewing the Market Minutes

Stocks fell on Thursday as investors were hesitant to buy ahead of this morning’s report. However, selling picked up in the last 90 minutes of trading to close trading at the lows of the day. The Nasdaq Composite ($COMP) was the biggest loser, dropping 2.75%, followed by the S&P 500 (SPX) down 2.38%, and the Dow Jones Industrial Average ($DJI) losing 1.94%. The selloff was broad with every sector closing in the red.

Stocks started the day lower after the European Central Bank (ECB) revealed plans to start raising its key rate in July and to stop purchasing new bonds but replacing them with existing bonds on their balance sheet. The market declared the ECB’s response to fighting inflation tepid and pushed the U.S. dollar higher on the day. The U.S. Dollar Index ($DXY) rallied nearly 1%.  

The technology sector was the worst performer on the day, but one bright spot in the falling tech sector was NXP Semiconductors (NXPI), rising 6.46% on reports that Samsung was interested in acquiring the chipmaker. The semiconductor industry continues to struggle as the PHLX Semiconductor Index (SOX) fell 2.69% on Thursday, leaving the SOX down more than 7% from its June high.

Luxury companies continue to be another positive group as Signet Jewelers (SIG) rallied 9.05% on better-than-expected earnings and revenues. After Thursday’s close, Vail Resorts (MTN) reported beating on top- and bottom line-numbers prompting the stock to rally 5.91% in after-hours trading. Last week, we saw positive earnings announcements from Capri Holdings (CPRI) the owner of brands like Versace, Jimmy Choo, and Michael Kors, as well as high-end retailer Nordstrom (JWN), and luxury homebuilder Toll Brothers (TOL). However, even among luxury stocks, it’s a stock pickers’ market because many in this group have fallen. 

Three Things to Watch

 

Timber: One area of inflation relief is in lumber prices. Unfortunately, it’s not because of new supply in the market. Instead, it’s a reaction to a softening housing market. Lumber futures fell 1.75% on Thursday to their lowest level in nine months. According to Business Insider, demand for homes is at a two-decade low. Barron’s reported that the sale of new homes has fallen 30% since December.

Falling lumber prices may have given Home Depot (HD) and Lowe’s (LOW) a bit of spark as both stocks closed higher on the day. However, both stocks still closed well off their intraday highs.

Betting Against the Spread: The ICE BofA U.S. High-Yield Index has moved higher after a slight dip the last two weeks and appears to be resuming its uptrend. You may remember that the high-yield index is also known as the credit spread and is used as a sentiment indicator. It measures the difference in yields between high-yield bonds and Treasury bonds. A rising spread suggest that investors are increasingly risk averse because they’re unwilling to take on the risk of high-yield lower rated bonds, often seen as a bearish signal for stocks.

The widening credit spread is also an interesting development as the Fed is scheduled to meet next week to discuss interest rates. In the past, the Fed has been reluctant to raise rates when the credit spread is widening. But fighting inflation will likely be the more important factor in their decision.

M&A: It appears that investors aren’t the only ones favoring value stocks, according to data from Evercore, between April and May, nearly $80 billion in mergers and acquisitions (M&A) were announced in the United States. Much of 2022’s deal levels were less $30 billion for weeks at a time. Rising interest rates have caused stock prices to fall and brought price-to-earnings ratios lower making M&A targets a better value. Corporation are joining market investors in looking for value stocks.  

More M&A deals could temporarily help boost stock prices. However, some market analysts see increased M&A activity as a bearish sign because it reflects an inability of companies to grow organically due to the weak economy. Other analysts see M&A as a bullish sign because it reduces the supply of competing shares and frees up money to be invested elsewhere.

Notable Calendar Items

June 13: Earnings from Oracle (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 21: Existing home sales

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

Featured image sourced from Unsplash

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