Investors Expect the Federal Reserve to Raise Rates Faster
Last Updated 4:10 PM EST
Stock indices were mixed at the end of Thursday’s trading session. The S&P 500 and the Dow Jones Industrial Average were down 0.3% and 0.46%, respectively. Meanwhile, the Nasdaq 100 gained 0.34%
Furthermore, Treasury yields gained today, with the U.S. 10-Year Treasury yield increasing to 2.96%, a decrease of 2.3 basis points. However, the Two-Year Treasury yield fell to 3.13%. This brings the spread between them to -17 basis points. As the yield curve remains inverted, fears of a recession continue to grow.
Compared to one week ago, the market is now pricing in a higher chance of a higher Fed Funds rate for the end of the year. In fact, the market’s expectations for a rate in the range of 3.75% to 4% increased to 24.8%, which is up from last week’s expectations of 5.1%. In addition, the market is now also assigning a 5.1% probability to a range of 4% to 4.25%. For reference, investors had assigned a 0% chance last week.
This rise in rate expectations is the result of yesterday’s higher-than-expected inflation report that showed that inflation is only getting worse. Indeed, on Thursday, even more evidence of persistent inflation was released in the form of the U.S. Producer Price Index (PPI), which measures the change in the price of goods sold by manufacturers. The report came in at 1.1% month-over-month, worse than the expected figure of 0.8%.
As a result, the Federal Reserve will likely have very little choice but to push interest rates higher than initially anticipated.
Initial Jobless Claims come in Lower than Expected
Last Updated 3:00 PM EST
Stock indices are mixed, heading into the final hour of today’s trading session. As of 3:00 p.m. EST, the S&P 500 and the Dow Jones Industrial Average were down 0.3% and 0.5%, respectively. Meanwhile, the Nasdaq 100 gained 0.4%
On Thursday, the Department of Labor released its Initial Jobless Claims report, which came in worse than expected. In the past week, 244,000 people filed for unemployment insurance for the first time. Expectations were for 235,000 individuals.
When using the four-week average, initial jobless claims were 232,500, up from last week’s reading of 235,750. It’s worth noting that this figure has been steadily trending upwards each week since the start of April 2022.
Also important, Continuing Jobless Claims, which measures the number of unemployed people who qualify for unemployment insurance, came in at 1.331 million, better than the forecast of 1.383 million and lower than last week’s 1.372 million.
Continuing Jobless Claims are in an overall downtrend and are currently sitting near their lowest levels since 1970. This suggests that more individuals are finding work than those who are filing for the first time.
However, this figure has been trending slightly upwards since the beginning of June. It will be interesting to see if this trend continues as interest rates rise while economic growth continues to slow down.
Average Gas Prices Continue to Trend Down
Last Updated 12:00PM EST
Stocks are negative halfway into Thursday’s trading session. As of 12:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 1%, 0.8%, and 0.4%, respectively.
WTI crude oil is currently hovering around $94 per barrel, which is off the session low of $90.58 per barrel as it tries to claw back some of its losses. The commodity’s recent pullback has led to lower gas prices across the country.
Undoubtedly, consumers welcome the drop as inflation has been cutting into their spending power. The national average for regular gas was last $4.605 per gallon, down from yesterday’s reading of $4.631. This is significantly lower than the all-time high of $5.016 per gallon on June 14.
The highest price can be found in California, where prices are substantially higher than the national average, at $5.991 per gallon. On the other hand, Georgia and South Carolina are the states with the lowest gas price, at $4.115 per gallon.
There’s no doubt that consumers hope this downward trend continues. However, it is likely to come at the cost of a recession as the Federal Reserve will likely be forced to act more aggressively after yesterday’s inflation report.
Stocks are Red to Start Thursday’s Trading Session
Last Updated 10:00AM EST
Stocks are negative 30 minutes into Thursday’s trading session. As of 10:00 a.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 1.8%, 1.8%, and 1.7%, respectively.
The energy sector (XLE) is the laggard so far, as it is down roughly 4%. Conversely, the consumer staples sector (XLP) is the session’s leader, with a loss of a little more than 1%.
WTI crude oil is slipping as its downward momentum resumed after a brief pause yesterday. Currently, its price is hovering around $92 per barrel, which equates to a decrease of over 4% from the previous close.
The decline in both stocks and oil is being fueled by fears of a more aggressive Federal Reserve that will almost surely lead to a recession.
Meanwhile, bond yields are higher as the U.S. 10-Year Treasury yield is now hovering around 2.99%. This represents an increase of over five basis points from the previous close.
Similar movements can be seen with the Two-Year yield, which is now at 3.23%. This means that the spread between the 10-Year and Two-Year U.S. Treasury yields is still negative and actually widening, as it currently sits at -24 basis points. This is important because many investors view an inverted yield curve as a precursor to a recession.
Pre-Market Update
Investors were largely pessimistic early on Thursday, leading to a drop in stock futures. June’s consumer price index (CPI) revealed a new high in more than 40 years increasing the possibility of a tighter-than-expected U.S. monetary.
Futures on the Dow Jones Industrial Average (DJIA) lost 1.63%, while those on the S&P 500 (SPX) moved 1.53% lower, as of 8.11 a.m. EST, Thursday. Meanwhile, the Nasdaq 100 (NDX) futures retracted by 1.14%.
Wednesday’s CPI reading for June revealed that prices for consumer goods had spiked 9.1% year-over-year. This came above the consensus estimate of an 8.8% growth. Moreover, the core CPI, which excludes food and energy prices, climbed 5.9% against the estimate of 5.7%.
The chance of a recession was heightened after the Federal Reserve released the Beige Book, which underscored the high possibility of a recession amid hot inflation.
In response to the June CPI reading, the yields at the bond market also fell. The 10-year Treasury yield dipped to 2.919, while the 2-year yield advanced nine basis points to 3.138%, maintaining the inverted yield curve which is a classic indication of a recession.
Last Friday’s revelation of a strong labor market and Wednesday’s CPI report led the market to speculate a tighter policy by the Fed, possibly a whole percentage point interest rate hike.
Additionally, the negative sentiment in the futures market was further fueled after BFSI giant JPMorgan (JPM) reported less-than-expected quarterly earnings performance, leading to a drop of more than 4% in the stock price.
Later on Thursday, investors are awaiting the weekly jobless claims and the wholesale price index reading for June, which will give us a wider peek into the economic situation.
