U.S. equities tumbled on Friday while Treasury yields spiked higher after U.S. inflation rose to a 40-year high, surpassing analyst estimates of a moderation in prices.
Food and energy pushed the headline reading +8.6% higher over the year to May, while consensus forecasts had expected prices to remain unchanged at 8.3% from April after moderating from +8.5% in May. The core measure which excluded food and energy did moderate although by less than expected, rising +6% over the year compared with +6.2% in April although slightly higher than the forecast +5.9%. The underlying components were seen moving higher in a broad advance, although much of the core components were still impacted by rising energy costs (airfares, freight, delivery, car rental etc), and according to David Rosenberg, President of Rosenberg Research, when removing the effect of higher energy prices core inflation over the month was +0.36 compared with +0.60% and closer to +4% over the year versus the official figure of +6% with higher energy prices continuing to have an outsized impact on underlying components. Still, the higher-than-expected readings add further pressure for the Federal Reserve to extend its aggressive rate increases in the coming months. In reaction to the inflation data, U.S. Fed Fund futures moved to price in another +0.5% increase by the Federal Reserve at its September meeting, following on from two +0.5% increases in June and July with expectations that rates will finish the year at +3.235%.
The S&P500 fell -2.91%, taking its weekly decline to -5.05% with all sectors lower on Friday led by consumer discretionary -4.16% and technology -3.89% with selling broad-based as 93% of stocks finished lower. The Dow Jones also weakened -2.73%, along with the Nasdaq Composite -3.52% and Russell 2000 -2.73% with the VIX spiking +6.36% to 27.75. Treasury yields climbed across the curve with the 2-year yield spiking +25 basis points to 3.065% along with the 10-year +11.5 basis points to 3.158% and 30-year +3 basis points to 3.196%. The spread between the 2 and 10-year yields narrowed to just +0.088% a sign that the market is increasingly concerned about the outlook for growth, viewing the Fed’s aggressive hiking as increasing the probability of causing a recession.
Ahead for the week, investors will be focused on producer price data for May on Tuesday night, followed by retail sales for May on Wednesday night ahead of the Fed’s policy meeting overnight Wednesday where it is widely expected to raise rates by +0.50%. This meeting will also see updated economic projections or the so-called “dot plots” and changes to the previous forecasts are likely to have a meaningful impact on markets.
European equities also finished lower on Friday, weighed by sentiment following U.S. inflation data. The Euro Stoxx 600 declined -2.69% along with the DAX -3.08%, CAC -2.69% and FTSE1000 -2.12% with major benchmarks across the region lower. Ahead for this week, investors will focus on German inflation data for May on Tuesday along with economic sentiment measures for both Germany and the Eurozone. Friday will bring the final reading of Eurozone inflation data which is expected to show core prices rose +3.8% over the year to May from +3.5% previously and headline prices rose to +8.1% compared to +7.4% in April.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is closed for a public holiday today, although traders can expect a weaker open when trading resumes on Tuesday with ASX200 futures finishing -112 points or -1.62% lower on Friday at 6,816. The index closed -1.25% lower on Friday, taking a weekly decline to -4.24% with all sectors lower with financials -1.55% and materials -1.05% weighing the most heavily given they account for half the index’s weight. Ahead for the week investors will be focused on consumer confidence for June on Wednesday, followed by unemployment data for May on Thursday expected to show a modest decline in the unemployment rate to +3.8% from +3.9% in April with +25k jobs expected to be added over the month.
Oil prices finished lower on Friday with both WTI and Brent crude down -0.69% and -0.86% to US$120.67 and US$122.01 a barrel. Base metals were mostly lower for the week with aluminum down -1.69% along with copper -0.55%, lead -0.97%, nickel -3.04% and zinc -4.45% while tin rose +0.96%. Iron ore futures in Singapore closed -1.43% lower on Friday and are down another -2.65% in early trade this morning at US$136. Gold climbed +1.28% on Friday to US$1,871 benefiting from its status as a store of value and protection from inflation, silver also gained +0.91% to US$21.89 while Bitcoin fell -3.266% and is a further -6.28% lower over the weekend at US$27,345.
Economic data:
- U.K. GDP (YoY Apr) 16:00
- Fed Brainard Speech 04:00
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.
