Market Snapshot: U.S. stocks end lower for 4th straight day as CPI data shows inflation at 41-year high

What drove markets

Inflation, in the shape of the June consumer-price index report, was the focus for traders on Wednesday.

Soaring gasoline prices in June drove the rate of U.S. inflation to 9.1%, a nearly 41-year peak. The CPI jumped 1.3% last month to mark the third time in the last four months it’s topped 1%. Economists polled by The Wall Street Journal had forecast a 1.1% advance.

“We continue to see new record highs for inflation and it will weigh heavily on the markets,” Greg Bassuk, chief executive at AXS Investments said in an interview. “We saw last month with CPI overshooting expectations, June ended up being really troubling for risk assets. And so we believe investors are increasingly concerned of even more aggressive Fed rate hikes and therefore the likelihood of exacerbating recessionary fears.”

After the CPI data was released, traders of Fed funds futures tied to the Fed’s policy rate are now pricing in a higher than 80% probability of a full percentage-point rate rise at the meeting this month, up from 7.6% on Tuesday, according to the CME FedWatch Tool.

President Joe Biden on Wednesday said in a statement that while a “headline inflation reading is unacceptably high, it is also out-of-date.” “Today’s data does not reflect the full impact of nearly 30 days of decreases in gas prices, that have reduced the price at the pump by about 40 cents since mid-June,” Biden said.

The International Monetary Fund on Tuesday warned that a surge in inflation poses “systemic risks” to the U.S. economy, a concern not lost on the Federal Reserve as it seeks to damp rising prices by sharply raising borrowing costs. The Fed’s tighter policy trajectory has removed liquidity from the market and helped pressure equity valuations.

However, Andrew Slimmon, an equity portfolio manager at Morgan Stanley Investment Management, argued that there’s a good chance that inflation has already peaked.

“There’re just too many inputs that are coming down…,” said Slimmon in an interview on Wednesday. “And this is one of the reasons why I think, for the equity market for the year, we’re in the range. I’m not saying the market’s going to take off from here, but I think we’re in the range of the low for the year. I think the second half of the year is going to be far better than the first half. “

Meanwhile, the U.S. corporate earnings season kicks into gear on Thursday, and investors will be watching results for the second quarter, and most important, the outlook for the rest of the year.

“Based on these continued high prices in energy, the supply-chain bottlenecks and corporate earnings are something that investors are going to be hyper focused on,” Bassuk said.

Stocks also need to see earnings are not as bad as consensus strategists’ bearish predictions, according to Slimmon.

“This is purely fact, the consensus estimate for the year has gone up, not down,” said Slimmon. “Companies have actually done better than what is expected and that number has not come down. I’m not saying it’s going to continue to go higher, but what it points to is that companies are doing better than what Wall Street expects.”

See: Wall Street profit expectations for megabanks have cooled ahead of earnings amid a deep freeze in stocks

Investors should continue to consider investments that can help protect against the impact of inflation, noted Bassuk. At the same time, “we think that high volatility is going to continue to characterize July markets,” Bassuk said. Thus investors should also consider alternative investments that are designed to cushion portfolios, according to Bassuk.

Companies in focus

Shares of Delta Air Lines Inc.
DAL,
-4.47%
 dropped 1.5% Wednesday, after the air carrier reported second-quarter profit that fell well short of expectations but revenue that rose above prepandemic levels to beat forecasts. Net income of $735 million, or $1.15 a share, was down from $1.44 billion, or $2.21 a share, in the same period in 2019. 

Shares of IronSource Ltd.
IS,
+47.09%
 jumped 50% Wednesday after the business app company agreed to be acquired by Unity Software Inc. in an all-stock deal valued at $4.4 billion. Unity stock fell about 3.8%.

Polestar Automotive Holding UK PLC
PSNYW,
+0.25%
shares went down 1.9% after the Swedish electric car company backed its full-year guidance for deliveries of 50,000 cars, as the company offered an update on its year-to-date performance.

Other markets

The U.S. 10-year Treasury yield
TMUBMUSD10Y,
2.936%
declined 5.5 basis point to 2.904%, down for three consecutive trading days.

The ICE Dollar Index
DXY,
-0.04%
was down 0.22% to $107.99.

West Texas Intermediate crude
CL.1,
+0.65%
CL00,
+0.65%
CLQ22,
+0.65%
for August delivery rose 46 cents, or 0.5%, to settle at $96.30 a barrel on the New York Mercantile Exchange.

Gold
GC00,
+0.49%
rose 0.6% to $1,734.20 an ounce.

Bitcoin
BTCUSD,
+0.01%
was 1.70% higher at around $19,621.

Japan’s NIKKEI 225 Index JP:NIK rose 0.5%, while the Shanghai Composite CN:SHCOMP gained 0.1%. European stocks sunk, with the STOXX Europe 600 Index
SXXP,
-1.01%
losing 1% and London’s FTSE 100 Index UK:UKX declining 0.7%.

-Jamie Chisholm contributed reporting to this article