Morning Coffee: Stocks Post Biggest Weekly Declines Since January

Posted by Steve Graham on 6/15/22 9:00 AM
U.S. stocks posted their biggest weekly percentage declines since January and ended sharply lower on Friday as a steeper-than-expected rise in U.S. consumer prices fueled fears of more aggressive interest rate hikes by the Federal Reserve.

The Labor Department’s report showed that the consumer price index (CPI) increased 1.0% in May after a 0.3% gain in April. The Dow Jones Industrial Average fell by 880 points or 2.73% to 31,393.79, the S&P 500 lost 116.96 points or 2.91% to 3,900.86 and the NASDAQ Composite lost 414.20 points, or3.52% to 11,340.02. The inflation report was published ahead of an anticipated second 50 basis point rate hike by the Fed this upcoming Wednesday. Another half a percent move is projected for July. There are worries the push to higher rates could result in recession. The major indexes recorded their biggest weekly percentage drops since the week ended Jan 21, with the Dow down 4.58%, the S&P 500 down 5.06%, and the NASDAQ composite losing 5.60%. Stocks have been volatile this year and recent selling has been tied to worries about inflation, rising interest rates, and the probability of a recession.

Consumer prices showed little signs of slowing in May, by rising 1.0%, which came in higher than expected and lifted the year-ago rate to a fresh 40-year record of 8.6%. Price increases were broadly-based, on both goods prices. (+1.3%) and services (+0.8%) contributing to the increase. While most categories recorded price increases in May, energy (+3.9%) and food (+1.2%) are providing most of the inflationary fuel. Still, the core rate rose 0.6% for a second month. The year-ago core reading did fall to 6.0% from 6.2%, suggesting that there is some progress being made in the war on inflation. The news on inflation is mixed, despite the high headline and year-ago numbers. Goods inflation is losing steam as Walmart and Target have been cutting inventories to clear overstocked warehouses. However, service industries are seeing stronger demand, with the result of higher prices at some of these industries, like hotels and airline fares are seeing demand increase, along with price increases. Wage inflation in service industries is becoming more entrenched and threatens to offset the goods provided by lower goods prices.

There is some growing evidence that goods inflation is easing as demand cools and supply chin problems improve. Shipping costs and port backlogs are easing. Monthly commerce from Adobe, recently showed inflation for goods bought online eased in May to a 2% annual rate in May from the March peak of 3.6%. The future of the economy will largely depend on the consumer, who must slow spending to cool inflation, but not run and hide, actions that might lead to a recession. Some economists project a fairly quick fall in inflation forces. Chief Economist Ian Shepherdson from Pantheon Macroeconomics projects a continuation of improving supply chains, a slowing of home price appreciation and the impacts on profits from rising inventories could bring the CPI down to 3% by year’s end. Whether we end up in recession will depend on the Fed knowing when to stop and at that moment will be a difficult decision to make.

Despite sharply higher prices, households have demonstrated uncanny staying power. Consumers are tapping their savings accounts and lowering their monthly savings amount and are using credit cards more frequently. Revolving credit card debt is now above the pre-pandemic level. While using credit cards is not a sustainable long-term driver of consumer spending, it does help out when a gallon of gasoline is over $5.00 a gallon. The truth is, the longer inflation persists and the more the Fed tightens, the more stress is on the consumer. At some point, something will break, inflation, the consumer, or both.

This upcoming week will be busy with economic data, with the focus on PPI inflation, retail sales, industrial production, and housing starts.

Tags: Economy, Morning Coffee

Latest Data

The U.S. Economy:

The trade deficit narrowed by the most in nearly nine-and-a-half years in April as exports jumped to a record high, putting trade contributing to economic growth this quarter. The trade deficit of both goods and services for April came in at $87.1 billion, down from $107.7 billion. The sharp decline reversed March’s surge and the report suggests that trade may be starting to return to normal after hitting successive highs, as the U.S. economy led the recovery from the pandemic global downturn. Exports of both goods and services increased 3.5% to $252.6 billion. The increase was led by shipments of industrial supplies and materials, which hit a new record level. There were also increased natural gas, precious metals, and petroleum products. Petroleum exports hit a new record high. Food exports were also the highest on record, with soybeans rapidly hitting a new record of $2.1 billion. Imports have been rising rapidly as businesses strive to increase inventory levels. Imports of goods and services fell 3.4% to $339.7 billion. Consumer goods imports fell by $6.3 billion, with declines in textile apparel and household goods, as well as toys, games, and sporting goods. The deficit widened on-trend as the global economy was slower off the blocks than the U.S. economy, spurring demand for imports. The coming months will see stronger export growth and weaker imports, heading to the old pre-pandemic ratio.

Consumer prices accelerated in May as gasoline prices hit a record high in May and the cost of services rose further. The CPI rose 1.0% in May, following a 0.3% advance in April. Over the last 12 months, the index was up 8.6%, the biggest 12-month increase since December 1981. The increase in the CPI was broad-based, but shelter, food, and energy were the biggest contributors to inflationary pressures. After declining in April, the energy index rose 3.9%, with the gas index rising 4.1%. Food prices rose 1.2% as food at home prices increased 1.4%. The core index rose 0.6%, the same increase as in April. The largest contributor to the core index in May was shelter, airline fares, used cars and trucks, and new vehicles. In the last year, energy prices were up 34.5% and food is up 10.1%. The report confirms that the Federal Reserve will move the fed funds rate up by half a percent in both June and July in one of its fastest-ever turns toward tighter monetary policy.

Important Data Releases This Week

  • The May producer price index report will be released on Tuesday at 8:30 AM. The May PPI report will confirm further what the CPI report underlined, the fact that inflation is not going away quickly. The PPI was up 11% from a year ago in April and is likely to be unchanged for May.

  • The May retail sales report will be released on Wednesday, June 15, at 8:30 AM. Over the last few months, consumers have been fighting against the worst inflation in 40 years. In April, retail sales grow 0.9%, the fourth consecutive monthly increase. However, retail sales are expressed in nominal terms, that is, not adjusted for inflation. Also, retail sales strongly reflect spending on goods, not services. Adjusted for inflation, real retail sales increased 1.2% and that is because in April some goods prices fell. In May, that factor will not repeat. In May, the 0.3% rise in retail sales will come out to be a 1.0% decline in real terms. This is a warning that although the consumer has been stalwart so far, this will not continue indefinitely.

  • The May housing starts report will be released on Thursday, June 16, at 10:00 AM. Housing starts inched 0.2% lower in April to 1.72 million. With rising mortgage rates, new home production likely fell again in May. April’s weakness was confined to its single-family sector. Permits in April fell 4.6% suggesting that higher mortgage rates are starting to curb activity, Multi-family starts soared in April but permits fell, indicating cooler activity is coming. Housing starts are projected to equal 1.71 million for May. Mortgage applications are falling off, but there are still decent backlogs to keep the industry busy for some time.

  • The May industrial production report will be released on Friday, June 17 at 9:15 AM. Industrial production has remained sturdy in recent months but could have been stronger except for a shortage of inputs. Total IP increased 1.1% in April. Manufacturing provided a nice 0.9% advance in April, boosted by a nice advance in auto production. Cooling demand will allow the supply chains to catch up and lower pricing power. Some industry’s inventory stocks have now exceeded pre-pandemic levels, suggesting a slight drawback in future needed production. All this suggests a still busy, but cooler environment for the industrial sector.





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