Stocks Finish Wednesday’s Session in Negative Territory
Last Updated 4:15 PM EST
Stock indices finished Wednesday’s trading session in negative territory. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 decreased by 0.67%, 0.45%, and 0.14%, respectively.
The industrial sector was the session’s laggard, as it declined by 1.22%. Conversely, the consumer discretionary sector was the session’s leader, with a gain of 0.82%. In addition, WTI crude oil gained slightly to $96 per barrel after yesterday’s big sell-off.
Furthermore, Treasury yields fell today, with the U.S. 10-Year Treasury yield falling to 2.91%, a decrease of 6.1 basis points. However, the Two-Year Treasury yield gained, meaning that it remains higher at 3.13%. This brings the spread between them to -22 basis points. As the negative spread continues to widen, the fears of a recession continue to grow.
In addition, the market is now expecting the Fed Funds Rate to be 3.61% by the end of the year based on the futures market. This is up 26 basis points from yesterday. The increase in expectations can be attributed to today’s higher-than-expected inflation report, which has investors believing that the federal reserve will need to be even more aggressive with its rate hikes.
Euro to USD Falls Briefly Below Parity; Bank of Canada Surprises with Large Rate Hike
Last Updated 3:00 PM EST
Equity markets are relatively flat, heading into the final hour of today’s trading session.
The U.S. Dollar continues to challenge the Euro amid fears of more economic turmoil in Europe due to the war in Ukraine. Energy prices remain high as Russia has reduced the amount of natural gas flowing into Europe.
This has caused the Euro to U.S. Dollar exchange rate to fall briefly below 1.00 again for the second day in a row. However, the exchange rate quickly rebounded above parity and is currently at 1.006.
In addition, the Canadian Dollar strengthened against both currencies after the Bank of Canada surprised economists with a 100 basis point increase in its benchmark rate. Expectations were for a hike of 75 basis points. The Bank of Canada explained that it is choosing to front-load the path to higher rates but that it is also not done raising rates, going forward.
The central bank believes that the neutral rate, which means when interest rates neither stimulate nor restrict the economy’s growth, is somewhere between 2% to 3%. With today’s increase, the benchmark rate is 2.5%. Thus, further increases will essentially lead to a restrictive policy.
Mortgage Applications Continue to Decrease
Last Updated 12:00PM EST
Stocks are red halfway into the trading session. As of 12:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 0.7%, 0.5%, and 0.2%, respectively.
The financial and industrial sectors (XLF) (XLI) are the laggards so far, as they are both down more than 1%, while the best performing sector, consumer discretionary (XLY), is up 0.8%.
WTI crude oil is flat on the day, at $95.55 per barrel, following its recent decline, while the U.S. 10-Year Treasury yield is hovering around 2.95%, pulling back 3.1 basis points from yesterday’s close. The spread between the 10-Year and Two-Year U.S. Treasury yields remains negative, as it currently sits at -16 basis points.
On Wednesday, the Mortgage Bankers Association released its weekly report for the U.S. 30-Year mortgage rate. The mortgage rate remained unchanged from last week’s reading of 5.74%.
Despite the unchanged rates, the number of mortgage applications decreased week-over-week by 1.7%. This follows last week’s decrease of 5.4%, indicating that homebuyers may be worried about a recession as sentiment and economic data continue to worsen.
Nevertheless, mortgage application volume is down substantially on a year-over-year basis, with the Mortgage Market Index at 300 compared to 727.5 on July 14, 2021.
Inflation Continues to Accelerate Faster than Expected
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 9.1%, compared to the forecast of 8.8%. The month-over-month print, which helps investors gauge whether or not inflation is accelerating, came in at 1.3% versus the expected 1.1%.
In addition, core CPI, which strips out volatile categories such as energy and food, increased 5.9% year-over-year and 0.7% month-over-month. Expectations were 5.7% and 0.6%, respectively.
Today’s inflation report not only confirms that inflation has not peaked but that it is also accelerating higher than anticipated. Therefore, 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 Wednesday’s trading session in negative territory, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 all down roughly 1.1%.
The materials sector (XLB) is the laggard so far, as it is down 1.5%. Conversely, the energy sector (XLE) is in the green, up 1.4%. Furthermore, crude oil is trading at $96 per barrel, a slight increase of 0.4%, while the U.S. 10-Year Treasury yield jumped to 3.03%.
Pre-Market Update
Stock futures were up early Wednesday morning as investors looked forward to the much-anticipated release of the consumer price index for June.
Futures on the Dow Jones Industrial Average (DJIA) climbed 0.34%, while those on the S&P 500 (SPX) moved 0.38% lower, as of 8:23 a.m. EST, Wednesday. Meanwhile, the Nasdaq 100 (NDX) futures slightly advanced by 0.45%.
Economists surveyed by Dow Jones said that the CPI data is likely to have surpassed May’s reading of 8.6% year-over-year growth, and reached 8.8% in June. Moreover, the belief that inflation has reached a new 40-year high has reached a certainty which is why investors are not significantly pessimistic.
Last Friday’s jobs report for June revealed that the labor market had shown immense resilience and remained stronger than expected. This has led to market speculation that the Federal Reserve might stop worrying much about a labor market contraction. Additionally, if the June CPI shows higher inflation, then the Fed will be most likely pursue a stronger policy tightening than expected.
Meanwhile, the fears of an impending economic slowdown are still hanging heavy on the markets. During the regular trading session on Tuesday, the S&P 500, Dow, and Nasdaq 100 closed 0.92%, 0.62%, and 0.97% lower, respectively. Losses accelerated in the last leg of Tuesday’s trading session.
Moreover, the highest performing segment, energy, also continued to be under pressure of recession worries, with oil companies being the biggest losers on Tuesday.
In fact, Tuesday’s last-hour losses were possibly stoked by an afternoon tweet posted by the White House Director of the National Economic Council. The tweet indicated that “stale gas price data” would be a major factor that has determined June’s inflation reading. This led many investors and traders to anticipate a higher-than-expected CPI figure.
