[New York Stock Market] US Inflation Shock Over 9% Leads to Decline... Dow Down 0.67%

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York Stock Exchange closed lower on the 13th (local time) following higher-than-expected inflation data. Last month’s Consumer Price Index (CPI) rose into the 9% range for the first time since 1981, sparking widespread forecasts that the central bank, the Federal Reserve (Fed), will accelerate its aggressive tightening measures. Concerns over a potential economic recession have also intensified.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 208.54 points (0.67%) from the previous session to close at 30,772.79. The large-cap focused S&P 500 index dropped 17.02 points (0.45%) to 3,801.78, while the tech-heavy Nasdaq index declined 17.15 points (0.15%) to close at 11,247.58.

Delta Air Lines, which released its earnings on the day, showed mixed signals with sales exceeding expectations but net income falling short. However, due to rising energy costs, operating profit margins failed to meet forecasts, causing Delta’s stock to slip nearly 5%. Fellow airline stocks United Airlines and American Airlines also fell by 0.84% and 3.11%, respectively. Cruise stocks Royal Caribbean and Carnival closed down 2.13% and 1.42%, respectively.

On the other hand, major tech stocks showed gains despite growth concerns. Amazon (+1.08%), Netflix (+1.21%), and Tesla (+1.70%) all rose more than 1% compared to the previous session. Twitter surged 7.90% after news broke that the company had filed a lawsuit against Elon Musk, Tesla’s CEO.

Investors closely monitored the released CPI data, the Fed’s tightening intensity, and movements in government bond yields.

The U.S. Department of Labor announced that the June Consumer Price Index (CPI) surged 9.1% year-over-year. This figure surpasses the previous month’s 8.6%, which was the largest increase since December 1981. It also exceeds expert forecasts of 8.8%. With no clear sign of inflation peaking, the Fed’s tightening measures are gaining momentum. There is even speculation about a so-called ‘jumbo step’ of a 1.0 percentage point increase in the benchmark interest rate at once.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market is pricing in a 76.2% probability of a 1.0 percentage point rate hike in July. This is a sharp increase from 0% a week ago and 7.6% the day before. Immediately after the CPI release this morning, the probability was in the 30-40% range, but the Bank of Canada’s surprise 1.0 percentage point hike due to high inflation has further fueled expectations that the Fed may also implement a large hike.

The Fed’s Beige Book, released on the same day, also confirmed concerns about inflation and the possibility of an economic recession. The Beige Book forecasted that inflationary pressures would persist at least until the end of the year. It also noted that recession risks are increasing in five regions, with several areas showing signs of weakening demand.

The Fed will hold its regular Federal Open Market Committee (FOMC) meeting over two days starting on the 26th of this month. Michael Schumacher of Wells Fargo said, "The Fed is expected to consider raising interest rates by more than 0.75 percentage points."

However, aggressive tightening is also fueling recession fears. The yield on the 2-year Treasury note, which is sensitive to Fed policy, surged to 3.13% on the day. Meanwhile, the yield on the longer-term 10-year Treasury note fell to 2.92%. Investors flocked to the safe haven of long-term government bonds, pushing bond prices up and yields down.

The inversion between the 10-year and 2-year Treasury yields continues, with the spread widening further. Such yield curve inversion is typically seen as a precursor to a recession. CNBC reported that the spread between the 10-year and 2-year yields is at its widest since 2000.

Bank of America (BoA) stated on the day that the U.S. could be entering a mild recession. Recent indicators point to slowing economic momentum, and consumer spending is also weakening due to inflation. James Knightley, Chief Economist at ING, said, "U.S. inflation has surpassed 9%. What the Fed is really concerned about is the magnitude of inflationary pressures," adding, "The threat of a recession is growing."

International oil prices rose slightly due to a rebound buying after an excessive drop. At the New York Mercantile Exchange, August West Texas Intermediate (WTI) crude oil prices closed at $96.30 per barrel, up 46 cents (0.48%) from the previous session.