Stocks retreated, while the dollar rebounded as investors geared up for a key inflation report that’s expected to bring more insights on the outlook for the Federal Reserve’s next steps.
(Bloomberg) — Stocks retreated, while the dollar rebounded as investors geared up for a key inflation report that’s expected to bring more insights on the outlook for the Federal Reserve’s next steps.
Tech led losses in the S&P 500, with Oracle Corp. sinking 11% — the most since 2020 — after a slowdown in cloud sales. Apple Inc. dropped before the unveiling of updated versions of its iPhone, smartwatch and AirPods. A rally in oil sent energy shares higher and added to concern about inflationary pressures. PNC Financial Services Group Inc. climbed, while Northern Trust Corp. slumped amid a presentation at the Barclays Global Financial Services Conference.
Read: BofA’s Blanch Sees Fed Policy at Risk as Oil Jumps: Surveillance
Treasury two-year yields, which are more sensitive to imminent Fed moves, topped 5%. The greenback snapped back after a brief pause in its bullish run. At least 11 companies are tapping the US investment-grade bond market on Tuesday as issuers press ahead to get deals done ahead of the inflation data.
Wednesday’s consumer-price index is expected to show a pick-up in inflation pressures. With the economy defying pessimism and energy prices rising, economists predict the biggest monthly jump in 14 months — and the swap market is pricing in risk that it will come in even higher than expected. Traders expect the Fed to stay on hold at next week, and see roughly a 50% chance that the central bank delivers a hike in November.
“In our view, it may be a good moment for investors to consider allocation moves that prepare for a re-firming of inflation this fall,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. “For example, cyclical growth equity sectors soared on hopes of a divine disinflation and near-term Fed cuts. Yet, if inflation re-emerges, these sectors might give up some of their year-to-date gains.”
Read: It Seems Like Nobody Thinks CPI Will Be Lower Than Forecast
The Cleveland Fed’s Nowcast model suggests upside risks for CPI, with persistently high inflation seen in September as well, according to Win Thin, global head of currency strategy at Brown Brothers Harriman.
“With inflation data expected to show ongoing stickiness, we think it’s risky to go into tomorrow’s CPI report short dollars,” Thin noted.
CPI is really key because if it halts its downward trend, markets will have to price in a more hawkish Fed — and that would be a headwind on stocks, said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter.
“Put in a more familiar way, CPI impacts two of the three pillars of the rally: disinflation and expectation the Fed is done with rate hikes,” Essaye noted. “If CPI is too hot, both will be damaged.”
Traders continued watching closely the negotiations between the United Auto Workers and automakers to prevent a strike. General Motors Co., Ford Motor Co. and Stellantis NV are under pressure to meet the demands of the UAW, which is seeking a new contract that replaces one expiring in just two days. A strike, even a short one, would ripple across the US economy. That includes possibly pushing Michigan into a brief recession.
Read: Musk, Zuckerberg Lead Parade of Tech Titans to Senate AI Event
There’s been a “dramatic shift” in investors’ equity allocation — a rush toward the US and an exodus from emerging markets, Bank of America Corp.’s latest global fund manager survey showed.
That’s had an impact on emerging markets equity allocation, which fell to a net 9% overweight in September from 34%, the lowest reading since November 2022. In contrast, allocation to US equities rose 29 percentage points to a net 7% overweight — the first overweight reading since August last year, according to the survey.
To Dan Wantrobski at Janney Montgomery Scott, the market continues to carve out a “rangebound glide path” near term, and this should possibly continue being the case as we move through September and into the final quarter of 2023.
“Overall, we believe elevated volatility will surface again, but stocks may still see more rally efforts over the short-run – making for a very choppy trading range.”
Corporate Highlights
- Arm Holdings Ltd.’s initial public offering is oversubscribed and bankers plan to stop taking orders this afternoon, according to people familiar with the matter.
- Alphabet Inc.’s Google pays more than $10 billion a year to maintain its position as the default search engine on web browsers and mobile devices, stifling competition, the US Justice Department said Tuesday at the start of a high-stakes antitrust trial in Washington.
- United Parcel Service Inc. will pay out the biggest portion of its new, five-year labor pact over the next 12 months while trying to win back customers it lost during the contentious contract talks, making for a challenging upcoming year, its chief executive said. The shares fell.
- Intel Corp. agreed to sell roughly 10% stake in the IMS Nanofabrication business to TSMC in a deal that values the company at $4.3 billion. The chipmaker rose.
- Chevron Corp. will become majority owner of what’s expected to be the world’s largest hydrogen production and storage facility as the oil giant invests in tech aimed at addressing the intermittency that plagues wind and solar power.
- Smurfit Kappa Group Plc agreed to acquire WestRock Co. in an $11.2 billion deal that creates an Irish-American packaging industry powerhouse.
Key events this week:
- Japan PPI, Wednesday
- Eurozone industrial production, Wednesday
- UK industrial production, Wednesday
- US CPI, Wednesday
- Tech leaders including Tesla’s Elon Musk and Meta Platforms’ Mark Zuckerberg are set to attend a forum on the future of AI convened by Senator Chuck Schumer, Wednesday
- Japan industrial production, Thursday
- European Central Bank policy meeting and news conference by President Christine Lagarde, Thursday
- US retail sales, PPI, business inventories, initial jobless claims, Thursday
- China property prices, retail sales, industrial production, Friday
- US industrial production, University of Michigan consumer sentiment, Empire Manufacturing index, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.3% as of 11:36 a.m. New York time
- The Nasdaq 100 fell 0.7%
- The Dow Jones Industrial Average was little changed
- The Stoxx Europe 600 fell 0.2%
- The MSCI World index fell 0.3%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro fell 0.2% to $1.0728
- The British pound fell 0.2% to $1.2480
- The Japanese yen fell 0.4% to 147.15 per dollar
Cryptocurrencies
- Bitcoin rose 4.5% to $26,205
- Ether rose 4% to $1,603.06
Bonds
- The yield on 10-year Treasuries was little changed at 4.28%
- Germany’s 10-year yield was little changed at 2.64%
- Britain’s 10-year yield declined five basis points to 4.42%
Commodities
- West Texas Intermediate crude rose 2% to $89.06 a barrel
- Gold futures fell 0.6% to $1,935.40 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee and Felice Maranz.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.