Stock Market Today – Friday, June 10: What You Need to Know

Investors Now Expect the Federal Reserve to be More Aggressive

Last Updated 4:15PM EST

All stocks finished the day in the red following a red hot inflation report. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 2.73%, 2.91%, and 3.56%, respectively. Today’s top-performing sector was the consumer staples sector, which saw a decline of 0.43%. The worst performing sector was consumer discretionary, as it saw a decline of almost 4%.

Crude oil, which is one of the main contributors to high inflation, is down slightly to $120.42 per barrel. Nevertheless, it continued its uptrend this week and doesn’t appear to be slowing down.

Today’s inflation report has caused inflation expectations to rise among investors, which was highlighted by the bond sell-off. If inflation remains high, investors are going to demand higher yields on their investments, and thus, will dump their current bond holdings in search of better income opportunities.

In addition, the market now expects the Federal Reserve to hike rates higher than previously thought. Indeed, on Thursday, investors were pricing in a 45.85% chance that the Fed Funds rate would be 2.75% to 3% by December 2022. However, the probability of this range has fallen to 11.8% today.

Investors now expect 3.25% to 3.5% to be the most probable scenario with a 34.45% chance, followed by a range of 3% to 3.25% at a probability of 32.73%.

If inflation expectations keep rising, it is likely that equities and bonds will continue to fall, along with real estate as higher yields will lead to higher mortgage rates.

Short-Term Treasury Yields Spike, Causing Yield Curve to Flatten

Last Updated 3:00PM EST

Equities are negative entering the final hour of Friday’s trading session. As of 3:00 p.m. EST, The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 1.89%, 2.06%, and 2.7%, respectively.

All sectors except the consumer staples (XLP) are negative, with the consumer discretionary sector being the biggest laggard so far, as it is down 3.3%.

Furthermore, WTI crude oil is still a little lower, as prices are currently hovering in the mid $120 range. On the other hand, Treasury yields continue to increase, with the U.S. 10-Year Treasury yield at 3.156%, an increase of 11.4 basis points.

The shorter-duration Treasury yields have spiked even more than the longer-term ones, with the two-year yield climbing over the 3% mark as well, an increase of more than 20 basis points.

This is causing the Treasury yield curve to flatten, which is an important indicator closely followed by investors. Many investors view a negative spread between the 10-year and the two-year yields as a warning sign of a pending recession. As of this writing, the current spread is 10.8 basis points, calculated as the 10-year yield minus the two-year yield.

Stock Sell-Off Continues, Consumer Inflation Expectations Rise

Last Updated 12:00PM EST

Equities are red halfway into Friday’s trading session. As of 12:00 p.m. EST, The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 2.33%, 2.6%, and 3.27%, respectively. All sectors are negative, with the consumer discretionary sector being the biggest laggard so far, as it is down 3.9%.

Furthermore, prices of WTI crude oil continue to slide, as prices are currently hovering in the mid $119 range. On the other hand, Treasury yields continue to increase on the back of a hot inflation report that suggests inflation has not peaked. As of this writing, the U.S. 10-Year Treasury yield is 3.157%, an increase of 11 basis points.

To add to the negativity, the University of Michigan released its survey on consumer inflation expectations over the next five years. Consumers now expect inflation to be 3.3% compared to 3% from the previous month. This number has been trending up over the past couple of years, now hitting the highest level since July 2008.

It’s also important for investors to note that these expectations were taken before today’s CPI report. It is likely that many consumers were under the impression that inflation had peaked. However, this sentiment will probably change after today, which could lead to higher expectations, going forward.

Stocks Sell Off as CPI Report Misses Expectations

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 8.6%, compared to the forecast of 8.3%. The month-over-month print, which helps investors gauge whether or not inflation is accelerating, came in at 1% versus the expected 0.7%.

In addition, core CPI, which strips out volatile categories such as energy and food, increased 6% year-over-year and 0.6% month-over-month. Expectations were 5.9% and 0.5%, respectively.

Today’s inflation report suggests that inflation has not peaked and that 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 Friday’s trading session in negative territory, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 down 1.97%, 2.14%, and 2.55%, respectively.

The consumer discretionary sector (XLY) is the laggard so far, as it is down 2.9%. Conversely, the energy sector (XLE) is in the green, up 0.08%.

Furthermore, crude oil is trading at $121.22 per barrel, a decline of 0.18%, while the U.S. 10-year Treasury yield spiked to 3.11%.

Pre-Market Update

Stock futures were mixed in the early hours of Friday as investors await May’s inflation data with bated breaths.

Futures on the Dow Jones Industrial Average (DJIA) inched down 0.07%, while those on the S&P 500 (SPX) barely scraped through above the flatline with a 0.06% gain, as of 5.16 a.m. EST, Friday. Meanwhile, the Nasdaq 100 (NDX) futures dipped 0.34%.

Slight Possible Hope Later Today

May’s consumer price index (CPI) report is due out before the market opens on Friday. The Dow Jones survey revealed that economists are anticipating an 8.3% increase in the main CPI and 5.9% increase in the core CPI (food and energy prices excluded), year-over-year.

This is important because if the data meets expectations, it will mean slightly lower inflation than in March, and the market can take it as an indication that we might have passed the peak of inflation. This cooler inflation might also lead the Fed to consider toning down its aggressive interest rate hikes.

At the end of Thursday’s regular session, the S&P 500 and Nasdaq Composite fell 2.38% and 2.74% respectively. Moreover, the Dow lost almost 2%. These moves were in anticipation of the May CPI as well.

Gas Prices Are Having Issues of Their Own

Meanwhile, gasoline prices in the U.S. are threatening to touch a record average of $5 a gallon. This persistent uptrend, which has a strong hand in pushing up inflation, is expected to remain high due to the sanctions on Russia.

Importantly, the fuel price surge is starting to cause coherent changes in consumer behavior. Energy consumption has so far been seen as an essential expenditure among households. But this way of thinking is possibly changing. Reportedly, drivers are trying to save on fuel consumption and are only filling up their tanks to a certain dollar amount, and are not going beyond that.

However, power-generation fuel stocks crashed by more than 16% on Thursday following the news of a fire at one of the U.S.A.’s largest liquefied-natural-gas export facilities in Texas. Power in Texas would be shut down for at least three weeks, which cannot be good news.

However, on the flip side, more fuel will be available for domestic consumers like utilities companies and manufacturers. Moreover, traders will be able to hoard some of the fuel for use later in the winter, when fuel prices may peak due to increased demand for heat.

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