Day Traders Diary

7/13/22

The major averages slipped on Wednesday after June inflation data hit its highest level since 1981, adding to growing fears that the Federal Reserve will get more aggressive in its fight to tame rising prices. The Dow Jones Industrial Average dropped 208 points, or 0.6%, while the S&P 500 dipped 17 points or 0.45%. The Nasdaq Composite slipped 17 points or 0.15% after bouncing earlier in the session.

The consumer price index rose 9.1% on a year-over-year basis in June, coming in even higher than May's 8.6% reading, which was the biggest increase since 1981. Economists surveyed by Dow Jones had anticipated an 8.8% print.

Core CPI, which excludes food and energy prices, came in at 5.9% and above the 5.7% estimate.

Consumer discretionary rose 1.7% boosted by gains in tech. Shares of Boeing, Dow and UnitedHealth slid more than 1% each, dragging the Dow into negative territory.

Battered tech shares Amazon, Nvidia, Netflix and Tesla staged a comeback on Wednesday, rising more than 1% each despite mounting growth concerns. The move brought the tech-heavy Nasdaq into positive territory. Twitter's stock rose 8% as the social media company sued Elon Musk.

Along with the inflation report, investors continued to monitor second-quarter earnings for clues into the health of U.S. companies. Delta Air Lines shares dropped 6.3% after posting mixed results.

Amid the news, United and American Airlines dipped 2% and 5%, respectively. Struggling cruise stocks Norwegian, Royal Caribbean and Carnival each fell about 2%.

June's hot inflation reading could prompt the central bank to hike another 75 basis points during this month's meeting or raise expectations of an even larger increase to tame surging prices. Last month, the Fed raised its benchmark interest rate three-quarters of a percentage point to a range of 1.5%-1.75% in its most aggressive hike since 1994.

Fed funds futures are now pricing in an 81 basis points rate hike for July. That would indicate that some in the market expect a rate hike of more than 75 basis points, and 100 could happen, he added.

Wednesday's hot CPI reading left many investors questioning whether inflation has in fact reached its peak. Headline CPI was up 1.3% and core CPI rose 0.7% on a monthly basis, compared with estimates of 1.1% and 0.5%, respectively. Monthly rental costs climbed 0.8% in June, the biggest increase since April 1986.

At the same time, crude oil, commodities prices and housing prices have come down in recent weeks, a signal that rising prices may have hit a wall, said Jeff Kilburg, chief investment officer and portfolio manager of Sanctuary Wealth.

The fallback in gasoline prices since reaching record highs in June could also signal that inflation has slowed, Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School of Business told CNBC's "Halftime Report" on Wednesday.

Treasury yields and the dollar surged after June's inflation report. The 10-year rate added 7 basis points to trade at 3.03%, while the 2-year jumped 11 basis points to 3.16% as the euro fell below parity with the U.S. dollar. Later in the session, the inversion between the two to hits its largest level since 2000.

 

Fears of a recession have climbed as inflation surges. Bank of America economists said Wednesday they are forecasting a mild recession later this year as real GDP growth declines and anticipate that the unemployment rate will jump to 4.6% in 2023.

During the first quarter, GDP declined by 1.5% and it is expected to fall 1.2% in the second, according to the latest estimates from the Atlanta Fed's GDPNow tracker. By definition, two consecutive quarters of negative GDP is often considered a recession.

That's likely also the case if the economy is heading into a recession since consumers still have excess cash as a cushion, he said. Whether that recession is enough to bring inflation down to the Fed's target of 2% will remain in focus, he said.

Along with negative GDP, the cost of borrowing continues to rise. At the same time, job growth remains strong with the latest data showing a 372,000 increase in nonfarm payrolls last month, according to the Bureau of Labor Statistics. Real wage growth is rising, albeit at a slower pace than inflation, which could spell further trouble for the economy.

In other news, investors are looking ahead to results from major banks including JPMorgan and Morgan Stanley slated for Thursday.

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