U.S. equities suffered their biggest daily drop in nearly two years, with sentiment weighed by a disappointing outlook by retail giant Target citing rising costs and inflation, while European, U.K. and Canadian inflation reached multi-decade highs.
Shares in Target slumped -24.9% in its worst day since the 1987 Black Monday crash, becoming the second retailer in two days to trim its profit forecast following Walmart on Tuesday. Fuel and freight costs surged in the first quarter while consumer spending caused a sharp slowdown in apparel and home-goods sales with CEO Brian Cornell saying a surge in costs showed little sign of easing. The S&P500 declined -4.04% with 98.4% of stocks lower with all sectors negative led by consumer discretionary -6.60% and consumer staples -6.38%. The Dow Jones also fell -3.57%, as did the Nasdaq Composite -4.73% and Russell 2000 -3.56% with the VIX spiking +18.62% to 30.96.
Higher inflation in the U.K., Eurozone and Canadian also prompted concerns that central banks will continue to tighten aggressively, raising the risk of causing a recession and creating a stagflationary environment whereby demand is lower while prices remain elevated. U.S. Treasury Secretary Janet Yellen said that while she does not expect a recession in the U.S. consumers should not expect immediate relief from higher gas and food prices noting “Higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world,”. Treasury yields were lower across the board as investors sought havens, with the 2-year yield down -3.5 basis points to 2.665%, as were both the 10 and 30-year rates by -10.2 and -11.2 basis points respectively with the U.S. dollar index advancing +0.53% to 103.905. The move in yields flattened the spread between the 2 and 10-year rate by -6.9 basis points to 0.221%. The spread briefly inverted in April this year, and signals investors are concerned about the outlook for economic growth, expecting tighter policy in the near term that will impact the economy, leading to lower rates in the future. Meanwhile, the median analyst is now forecasting a 30% chance of a recession in the next year, up from 15% at the start of the year.
European equities were also lower, snapping a three-day winning streak as inflation reached the highest levels in 40-years, although was marginally below estimates. U.K. inflation rose +9% over the year to April from +7% previously compared with estimates of +9.1%, while core prices rose +6.2% from +5.7% previously. In the Eurozone, headline inflation was unchanged at +7.4%, modestly below the +7.5% estimated while core prices climbed to +3.5% from +2.9% as forecast. The Euro Stoxx 600 declined -1.14% weighed by consumer staples -2.02% and consumer discretionary -2.0% while utilities +0.69% and energy +0.43% outperformed. The DAX declined -1.26%, as did the CAC -1.20% and FTSE100 -1.07% with weakness across the region. Both the Euro and Pound weakened -0.82% to 1.0464and -1.22% to 1.2341 respectively.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a decisively lower open this morning with ASX200 futures down -130 points or -1.81%. The index gained +0.99% on Wednesday following optimism over easing Chinese lockdowns as well as a positive lead from Wall Street on Tuesday. Materials were the largest contributor to the index’s gains, rising +2.5% followed by technology +1.91% and industrials +1.79%. A +2.2% rise in the iron ore price helped major miners with BHP gaining +3.2%, as did RIO +2.1% and FMG +2%. Meanwhile, real wages declined to the lowest level since 2014 data showed on Wednesday as inflation exceeded wage growth. The wage growth price index year-on-year to March rose +2.4% from +2.3% previously, missing estimates of +2.5% while inflation sits at +5.1%. The Australian dollar fell -1.05% overnight to 0.6955 while the yield on 10-year government bonds rose +5.5 basis points to 3.460%. Investors will focus on unemployment data out at 11:30 AEDT today expected to show +30k jobs were added in April from +17.9k in March and the unemployment rate edge down to +3.9% from +4.0%.
Oil prices were lower overnight with both WTI and Brent crude falling -2.79% and -2.39% respectively to US$109.26 and US$109.32 a barrel. Iron ore futures in Singapore are -2.40% lower in early trade this morning at US$122.20 reversing gains in the spot price. Gold edged +0.08% higher to US$1,816.60 with lower real yields in the U.S. offsetting a stronger USD, silver meanwhile weakened -0.98% to US$21.42 and Bitcoin was -2.90% lower at US$29,205.
Economic data:
- Australian Unemployment (MoM Apr) 11:30
- ECB Policy Minutes 21:30
- U.S. Initial Jobless Claims (14th May) 22:30
- U.S. Leading Index (MoM Apr) 00:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
