Stock Futures Drop After Inflation Accelerates

Stock futures dropped and bond yields jumped after inflation reached a new four-decade high, adding to investors’ expectations that the Federal Reserve will keep tightening monetary policy to control price growth.

Futures for the S&P 500 dropped 1.6%, having traded higher before the publication of data showing that consumer-price inflation accelerated to 9.1% in June. That marked an increase from the 8.6% recorded in May and was a faster rate of inflation than economists had expected.

Technology stocks, sensitive to rising interest rates, were poised to tumble. Contracts for the tech-focused Nasdaq-100 lost 2.2%.

Government bonds sold off, pushing yields higher. The yield on 10-year Treasury notes jumped to 3.033% from 2.958% Tuesday.

The fastest pace of consumer-price growth in four decades has upended financial markets this year by pushing the Federal Reserve to raise interest rates at a rapid clip. The end of the central bank’s pandemic-era stimulus policies has dragged on the stock market, boosted yields on government and corporate bonds, and sent the dollar higher. More recently, the Fed’s drive to tighten monetary policy has raised concerns about a looming recession.

“I think the central banks are going to want to see much more than that before they give the all-clear,” said Paul O’Connor, head of multiasset at Janus Henderson Investors.

Falling prices for commodities such as oil, grains, and industrial metals in recent weeks could be a sign that inflation is starting to ease. Some retailers meanwhile are offering discounts to shed unwanted inventory.

But even if inflation does start to relent, investors expect the Fed to keep raising interest rates and unwinding its bond-purchase program this year. The central bank’s focus, Mr. O’Connor said, is to make sure workers and companies don’t begin to expect inflation to become entrenched—a dynamic that economic theory suggests could become self-reinforcing.

Delta Air Lines shares dropped 5.9% premarket after it said strong demand helped it turn a profit during the second quarter, though expenses also climbed. Unity Software fell 17% after agreeing to merge with app company ironSource, which rose 49%. Industrial supplier Fastenal said there were signs that demand is starting to soften, sending its shares down 5.5% premarket.

Earnings season will pick up pace Thursday when the nation’s biggest banks begin to report.

Oil prices stabilized after tumbling more than 7% Tuesday as investors bet that an economic downturn will weigh on fuel demand. Brent crude futures edged down 0.7% to $98.82 a barrel. They are 18% lower than a month ago, a decline that has fed through to lower gasoline prices at the pump. The International Energy Agency said the crisis in oil supplies appears to be easing, pointing to a slowdown in demand and rising output in North America.

The WSJ Dollar Index, which tracks the U.S. currency against a basket of others, rose 0.4%. The euro fell 0.3% to $1.0006, trading close to parity against the dollar for the first time since 2002. Many investors are gloomy about the outlook for the eurozone as the war in Ukraine threatens the continent’s supplies of natural gas, a vital fuel for heating and power generation.

International markets were mixed. Losses for auto and insurance stocks pushed the Stoxx Europe 600 down 1.6%. Airline stocks including British Airways owner International Consolidated Airlines Group came under further pressure from the industry’s travails in coping with a revival in air travel.

In Asia, the Shanghai Composite Index added 0.1% and Japan’s Nikkei 225 gained 0.5%.

Source By: The wall street journal