Several American stocks decreased on Monday as the Dow Jones share decreased by 0.5%, the S&P 500 1.2%, and the Nasdaq Composite 2.3%. A day later, the shares finished lower, prompting investors to prepare for the most significant inflation in four decades.
The inflation report threw a shadow on the economic calendar. As a result, investors are currently hesitating to open new positions, even if the White House rejected the report and explained that it was 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.
Operators also remain wary of corporate earnings prospects amid signs of slowing global economic growth. However, the drop in commodity prices has given hope 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 won’t 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 higher than 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 over 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 predicted 5.9% growth in April, but the difference reflects growing concerns that inflation and rising borrowing costs imposed by central banks are pushing down profit margins.
Turning to economic data, the National Federation of Independent Business said Tuesday that the small business optimism index took a hit, last seen in the early months of the 2020 pandemic, showing that the index has collapsed in five of the past 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 security from public debt. However, the rally in Treasuries caused the spread between 2-year and 10-year bonds to narrow to -8.5 basis points, the deepest inversion since early 2007.