A rally in megacaps drove a rebound in U.S. stocks from session lows, following a plunge caused by a shockingly hot U.S. inflation reading.
The S&P 500 pared losses thanks to gains in giants like Tesla Inc. and Amazon.com Inc., while the tech-heavy Nasdaq 100 turned green.
The biggest surge in consumer prices since 1981 showed that a peak in the economic gauge may still be out of reach, fueling wagers officials could hike by a full percentage point in July -- raising the odds of a recession.
Treasury two-year rates -- which are more sensitive to imminent changes in Fed policy -- climbed as much as 16 basis points to about 3.21%. The dollar hovered near a two-year high, while the euro briefly fell below $1 for the first time since 2002. The loonie rose as the Bank of Canada hiked rates by a full percentage point.
The consumer price index rose 9.1% in June from a year earlier in a broad-based advance. The widely followed inflation gauge increased 1.3% from a month earlier, the most since 2005, reflecting higher gasoline, shelter and food costs. Economists surveyed projected a 1.1% rise from May and an 8.8% year-over-year increase.
Comments on CPI:
- “The June CPI release was an ugly print, no getting around it,” said Cliff Hodge, chief investment officer at Cornerstone Financial. “The Fed has no choice but to follow through on a more aggressive path, which raises the probability of recession next year.”
- “Clearly we’re not out of the inflation woods yet,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley. “Another three-quarter percent hike from the Fed is pretty much a forgone conclusion at this point, and we’re likely in for a bumpy ride in the market.”
- “The only option available to the Fed is to slow economic growth enough to bring domestic demand down to meet constrained supply -- possibly tipping the U.S. into recession,” said Richard Flynn, managing director of Charles Schwab UK.
- “Inflation keeps heating up, defying expectations for a peak to be reached,” said Seema Shah, chief global strategist at Principal Global Investors. “We see rates moving to 4.25% next year as the Fed desperately attempts to recover from its earlier erroneous inflation read.”
- “Every month we wait for it to peak and are getting disappointed,” said Neil Birrell, chief investment officer at Premier Miton Investors. “Core inflation is the root of the problem, and this probably confirms a 75bps move by the Fed at the next meeting.”
Bank of America Corp. economists forecast a “mild recession this year” in the U.S., saying services spending is slowing and high inflation is spurring consumers to pull back. The economists expect fourth-quarter U.S. gross domestic product to decline 1.4% from a year earlier, followed by a 1% increase in 2023.
The multi-year market mantra of TINA -- there is no alternative to equities -- is facing a major threat as bond yields are looking more attractive. The percentage of S&P 500 members with a dividend yield higher than the 10-year U.S. Treasury rate has fallen to the lowest since 2007. Corporate payouts are under pressure as companies grapple with fears of recession, historically high inflation and supply constraints.
In corporate news, Delta Air Lines Inc. fell short of profit expectations in the second quarter and said high operating costs will persist through the rest of the year. Spirit Airlines Inc. agreed to delay a planned shareholder vote yet again on a proposed acquisition by Frontier Group Holdings Inc.
Investors fixated on the looming risk of recession are about to get a crucial read on a question that’s been burning a hole through markets for months: whether bank earnings will show cracks forming in the economy. Net interest income for the six largest U.S. lenders is expected to rise by roughly 15%, while at the same time mortgage and investment-banking revenue is projected to decline, according to data compiled by Bloomberg.