Several US stocks fell Monday as the Dow Jones stock fell 0.5%, the S&P 500 by 1.2% and the Nasdaq Composite by 2.3%. The next day, stocks closed lower, prompting investors to prepare for the biggest inflation of the past four decades.
Market drive
The inflation report casts a shadow on the economic calendar. As a result, investors are currently reluctant to open new positions, even as the White House rejected the report, declaring it obsolete.
“The overarching driver of trade today is the CPI report tomorrow and investors’ reluctance to get out directionally one way or the other in advance of it,” said Janney Montgomery Scott chief investment March Luschini.
Traders also remain wary of companies’ earnings prospects, despite signs of a slowdown in global economic growth.
However, the drop in commodity prices has raised hopes that the Federal Reserve will cut interest rates again next year.
“There’s been some talk of peak inflation in the US due – among other reasons – to a fall in some agriculture food prices,” said City Index financial markets analyst Fawad Razaqzada.
“After all, it was the soaring prices of wheat, corn, and other soft commodities, as well as energy, that have boosted inflation so much over the past year or so.”
“With these prices coming down a little, this is clearly some good news – and some light at the end of the tunnel,” Razaqzada added.
Despite his optimism, Fawad Razaqzada believes the decline in commodity prices will not be reflected in the June consumer price index.
“So, just like May, there is a risk that inflation could overshoot again. If so, this will likely trigger fresh gains for the dollar.”
Investors have expressed concern about the currency’s impact on corporate earnings as the dollar’s value skyrockets.
“Investors are thinking about what it means in terms of tightening financial conditions,” said Luschini. “Plus the fact that it will work to be counterproductive to earnings.”
The dollar rose above its major rivals but pulled back from a two-decade high for the ICE US Dollar DXY Index on Tuesday after the EURUSD approached parity with the US currency for the first time in more than 20 years.
Major banks kick off the earnings season
According to FactSet, analysts expect an average 4.3% increase for companies in the S&P 500, the weakest since late 2020.
Analysts had forecast an April growth of 5.9%, but the difference reflects growing concerns that inflation and rising central bank borrowing costs are squeezing profit margins.
Turning to economic data, the National Federation of Independent Businesses said on Tuesday that the Small Business Optimism Index took a hit for the last time in the early months of the 2020 pandemic, showing that the index had collapsed in five of the last six months.
A survey found that 34% of respondents cite inflation as their top concern, indicating that inflation continues to hurt small businesses.
Meanwhile, the US 10-year yield BX: TMUBMUSD10Y fell 2.958% as traders sought the safety of sovereign debt.
However, the rally in Treasuries narrowed the 2-year to 10-year spread to -8.5 basis points, the most significant reversal since the start of 2007.
