Closing Stock Market SummaryThe stock market tossed and turned today, but it was really the interest rate markets that called the shots -- and those markets were more foe than friend.
The 2-yr note yield settled the session up 16 basis points at 3.43% and the 10-yr note yield settled the session up 12 basis points at 3.48%. Meanwhile, the fed funds futures market upped its rate-hike game, pricing in the probability of more aggressive policy moves by the FOMC at upcoming meetings, including the June meeting which will culminate with the release of a new policy directive and updated economic and interest rate projections on Wednesday.
Briefly, the CME's Fed Watch Tool shows a 96.6% probability of a 75-basis point rate hike on Wednesday (up from 3.9% a week ago), a 95.8% probability of another 75-basis point rate hike in July (up from 0.4% a week ago), and a 97.0% probability of another 50-basis point rate hike in September.
If this course is followed by the FOMC, the target range for the fed funds rate will be 2.75-3.00% after the September meeting. A week ago, the fed funds futures market assigned only a 0.2% probability to the target range being that high after the September meeting.
Market participants looked at the rapid pace of change in Treasury yields and fed funds futures with some trepidation, worrying that the higher rates will lead to a marked slowdown in economic growth -- or possibly a recession -- that will lead to a marked downturn in earnings growth.
Consequently, rebound efforts today lacked conviction. The major indices all hit new 52-week lows at one point today. The S&P 500 for its part flirted with a break of the 3700 mark. It stopped short at 3705.68 where it found some buying interest that repaired a small part of today's damage.
Things would have been worse if not for the outperformance of the information technology sector (+0.6%), which is the market's most heavily-weighted sector. It was helped by some pleasing earnings results and guidance from Oracle (ORCL 70.78, +6.73, +10.5%) and relative strength in the semiconductor stocks. The Philadelphia Semiconductor Index gained 0.6%.
The only other sector that eked out a win was the energy sector (+0.1%), but that was a hollow victory considering it was up as much as 3.2% earlier in the day.
The energy sector pulled back intraday along with oil prices ($118.50, -2.43, -2.0%), which had edged above $123.00/bbl earlier in the session. Meanwhile, natural gas futures ($7.29/mmbtu, -1.32, -15.3%) were down big all day, getting squeezed by excess supply concerns following a report from Freeport LNG that a fire last week at a Texas facility interrupted the transfer of LNG from storage tanks to dock facilities. Freeport LNG does not expect the plant to return to full operations until late 2022.
Separately, the Dow Jones Transportation Average (+2.1%) had a standout day, not so much because of the drop in oil prices, but because of a standout performance by FedEx (FDX 229.95, +28.97, +14.4%), which rallied after announcing three, new independent directors and a 53% increase in its quarterly dividend to $1.15 per common share.
The main laggards of note today were the utilities (-2.6%), consumer staples (-1.3%), health care (-1.1%), real estate (-1.0%), and financial (-0.9%) sectors. These sectors sport some of the highest dividend yields, but with yields rising as sharply as they have in risk-free Treasuries, they presumably saw some defections from income-oriented investors.
The May PPI report was released before the open. It was not as bad as feared, but it still wasn't good with total PPI up 10.8% year-over-year and core PPI, which excludes food and energy, up 8.3%.
Reviewing today's economic data:
- The May NFIB Small Business Optimism Index checked in at 93.1 versus 93.2 in April.
- The PPI for final demand increased 0.8% month-over-month in May (consensus 0.8%) following a downwardly revised 0.2% increase (from 0.5%) in April. The index for final demand, less foods and energy, rose 0.5% ( consensus 0.6%) following a downwardly revised 0.2% increase (from 0.4%) in April. On a year-over-year basis, the PPI for final demand was up 10.8%, versus 10.9% in April, and the index for final demand, less foods and energy, was up 8.3%, versus 8.6% in April.
- The key takeaway from the report is the year-over-year moderation seen for both PPI for final demand and the index for final demand, less foods and energy. That is supportive of the peak inflation narrative, although the shadow of the disappointing May CPI report, and the bump seen in energy costs this month, should mitigate some of the enthusiasm for today's report.
Looking ahead, market participants will receive the weekly mortgage applications report (7:00 a.m. ET), the May Retail Sales Report (8:30 ET), May Import-Export Price Index (8:30 a.m. ET), June Empire State Manufacturing Survey (8:30 a.m. ET), April Business Inventories (10:00 a.m. ET), June NAHB Housing Market Index (10:00 a.m. ET), FOMC Rate Decision (2:00 p.m. ET), and April Net Long-Term TIC Flows (4:00 p.m. ET) on Wednesday. In addition, Fed Chair Powell will hold his press conference at 2:30 p.m. ET.
- Dow Jones Industrial Average: -16.5% YTD
- S&P 400: -19.6% YTD
- S&P 500: -21.6% YTD
- Russell 2000: -23.9% YTD
- Nasdaq Composite: -30.8% YTD