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Daily Markets: Has Inflation Peaked, and What Will the Fed Do?

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Today’s Big Picture

Asia-Pacific equity indexes ended today’s session mixed as China’s Shanghai Composite rose 1.02% on covid re-opening optimism, and Hong Kong’s Hang Seng was essentially flat after rising 0.41 points on a roughly 21,000 point index level. Taiwan’s TAIEX fell 0.15%, India’s Sensex dropped 0.29%, South Korea’s KOSPI declined 0.46% and Japan’s Nikkei closed 1.32% lower. Australia’s ASX All Ordinaries led the way, down 3.69% on the day. By mid-day trading, European equity indices are down across the board and U.S. futures point to a modestly positive open later this morning.

As stocks look to rebound after yesterday’s drubbing, the May Producer Price Index (PPI) report could either accelerate that rebound or throw cold water on it should it mimic the May Consumer Price Index (CPI) report, which had come in hotter than expected and pushed back on the notion inflation had peaked. Consensus expectations call for the May headline PPI figure to come in at 10.9% YoY, down a tick from 11.0% in April, while the core reading for May that excludes food and energy is thought to drift lower to 8.6% YoY vs. 8.8% in April. In response to the May CPI report, expectations that had been calling for the Fed to boost interest rates by 50 basis points exiting tomorrow’s monetary policy meeting have been elevated in recent days. The CME Group’s FedWatch tool that measures pricing in the fed funds futures markets now sees a 99.8% chance of a 75-basis point move by the Fed tomorrow.

That rapid resetting of expectations helps to explain the latest bout of stock market pain, but the question creeping into the market is should the May PPI report confirm the peak inflation narrative is incorrect, what does it mean for the Fed’s July monetary policy meeting? Once again, Fed Chair Powell will be walking a monetary policy tight rope as he looks to convince the Fed can get ahead of the inflation fight without sabotaging the economy along the way. Complicating matters is the re-imposition of lockdown restrictions in Beijing, which reported the highest number of daily Covid-19 cases in three weeks just days after starting to ease them. We say complicating because data from China’s Ministry of Industry and Information Technology points to 96.3% of industrial businesses in Shanghai having resumed work, with a production rate above 70%.

In short, today could be a critical day for the markets. Let’s break it down for you.

Data Download

International Economy

This morning saw the final release of April YoY Japanese Industrial Production at -4.90% just 0.10% lower than the preliminary figure.

April UK Unemployment ticked slightly higher to 3.8% from both expectations and the previously reported 3.7% rate while April Average Weekly Earnings excluding bonuses remained steady at 4.2% and including bonuses came in at 6.8%, 1.0% lower than expectations and just under the previously reported 7.0%

Final YoY May CPI for Germany was unchanged from the preliminary release of 8.7%. Sentiment in Germany, while still negative showed some improvement from the previous surveys as the Zew Current Situation came is at -27.6 from the previously reported -36.5 and Economic sentiment was surveyed at -28.0 improving from the previous reading of -34.3.

Domestic Economy

This morning saw the release of the National Federation of Independent Business (NFIB) Small Business Optimism Index for May which ticked down to 93.1 from the previously reported 93.2. This marks the fifth consecutive month below the 48-year average of 98. Business owners expecting better conditions over the next six months fell 4 points to a net -54%, the lowest reading recorded in the 48-year history of the NFIB’s survey.

8:30 AM ET will see the release of the May Producer Price Index which we talked about earlier. To reiterate, PPI coming in lower than expectations will be met with huge relief while seeing a number that exceeds expectations will bring about huge concerns about the steps the Fed will need to take to tame inflation.

Markets

A host of issues weighed on stocks yesterday including worries about the Fed taking a more aggressive rate-hike path to fight inflation; renewed lockdowns/shutdowns in Shanghai and Beijing due to the detection of new COVID cases; concerns over further cuts to forward earnings estimates; stagflation; the impact of a rising interest rate environment on the economy and concerns over forced selling due to margin calls. Those forces combined to send the S&P 500 down 3.88% on the day, with the Nasdaq Composite losing 4.68% and the Dow Jones Industrial Average shedding 2.79%. To give readers some additional color on yesterday’s market, all 11 S&P 500 sectors closed with losses that ranged from 2.2% for consumer staples to 5.1% for energy with 9 of the 11 sectors down at least 3.0%. Including yesterday’s moves, here’s how the major market indicators stack up year-to-date:

  • Dow Jones Industrial Average: -16.02%
  • S&P 500: -21.33%
  • Nasdaq Composite: -30.91%
  • Russell 2000: -23.64%
  • Bitcoin (BTC-USD): -52.99%
  • Ether (ETH-USD): -68.41%

Stocks to Watch

Before trading kicks off for U.S.-listed equities, there are no market moving quarterly earnings reports expected. As the pace of investor conferences picks up, it would be smart for investors to listen closely for any pre-announcements for the current quarter or the back half of the year.

Oracle (ORCL) reported a quarterly EPS of $1.54 on revenue of $11.8 billion for its May quarter, and both figures topped respective consensus expectations. Cloud services and license support sales, which included software as a service and infrastructure as a service rose 3% YoY to $7.61 billion. Cloud and on-premise licensing revenue rose 16% to $2.54 billion, while hardware sales declined by 3% to $856 million. For its August quarter, Oracle sees EPS of $1.09-1.13 vs. the $1.13 consensus with revenue growth of +20%-22% YoY in constant currency, which implies $11.67-$11.87 billion vs. the $10.2 billion consensus.

Alongside comments about the company moving its headquarters to Arlington, Virginia, Boeing (BA) CEO Dave Calhoun shared demand for airplanes is strong and will continue to improve as airlines seek to replace aging fleets, buy more efficient models and continue to see passenger growth.

Coty (COTY) reaffirmed its guidance for its fiscal 2022 with EPS of $0.23-0.27 vs. the $0.28 consensus.

Buy Now, Pay Later company Affirm Holdings (AFRM) announced it has teamed up with Agoda, part of Booking Holdings (BKNG), to offer travelers to pay for their hotel accommodations over time.

IFF (IFF) introduced its new GUARDIAN family of products, an innovative line of plant extract-based formulations, and synergistic oxidation control solutions.

ResMed (RMD) announced it will acquire privately held MEDIFOX DAN, a German out-of-hospital software solutions provider across the care continuum for ~$1 billion from Hg, a leading software and services investor.

Hyzon Motors (HYZN) signed a definitive agreement to acquire ORTEN Betriebs and subsidiaries, and ORTEN Electric Trucks, German manufacturers of innovative truck and trailer bodies for the beverage industry.

Urban One (UONEK) signed a definitive asset purchase agreement with Emmis Communications to purchase its Indianapolis Radio Cluster.

Tesla’s (TSLA) Elon Musk is set to participate in an all-hands meeting with Twitter (TWTR) employees on Thursday.

NIO Inc. (NIO) expects to host a Product Launch Event on Wednesday, June 15, 2022.

IPOs

No new IPOs are expected to start trading this week. Readers looking to dig more into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

Sprinklr (CXM) is expected to report its quarterly results after equities stop trading today. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar.

On the Horizon

Wednesday, June 15

  • Japan: Core Machinery Orders – April
  • China: Industrial Production, Retail Sales – May
  • Eurozone: Industrial Production – April
  • US: Weekly MBA Mortgage Applications
  • US: Retail Sales – May
  • US: NAHB Housing Market. Index – June
  • US: Weekly EIA Crude Oil Inventories
  • US: FOMC Meeting Decision

Thursday, June 16

  • UK: Car Registrations – May
  • Eurozone: Wages & Labor Cost Index – 1Q 2022
  • UK: Bank of England Interest Rate Decision
  • US: Weekly Initial & Continuing Jobless Claims
  • US: Housing Starts & Building Permits – May
  • US: Philly Fed Manufacturing Index – June
  • US: Weekly EIA Natural Gas Inventories

Friday, June 17

  • Eurozone: Consumer Price Index – May

Thought for the Day

“Everything’s impossible until somebody does it.” ~ Batman

Disclosures

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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