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Inflation & Limit Down Days

U.S. Stock markets closed sharply lower on Friday, 10th June 2022, after U.S. inflation hit a 40-year high and consumer sentiment fell to a record low. 

Labour Department data on Friday showed the consumer price index rose 1% from April and 8.6% from a year ago. Core CPI which is ex-food and energy rose 0.6% from a month ago and 6% from last year. All these numbers were higher than forecast. 

Separately, the University of Michigan’s preliminary June sentiment index fell to 50.2 from 58.4 in May, data released Friday showed. The median estimate was 58.1. 

The data is leading the market to expect a more hawkish Fed with some calling for a 75 basis point hike at the next meeting. While highly unlikely, the sentiment is that the Fed will need to step up its course to reign in this stubbornly high inflation. 

For the week the S&P fell 2.9%, the second-worst week of the year, and the 9th weekly drop in 10 weeks. 

The two-year yield jumped over 3% the highest since 2008. The 2 years tracks closely to the Fed Funds rate expectations. 

Here are the closing levels on Friday, 10th June 2022:- 

 Last Change %Change 
Dow Jones 31,392.79. -880.00. -2.73% 
S&P 500 3,900.86 -116.96. -2.91% 
Nasdaq Comp 11,340.02 -414.21. -3.52% 
U.S. 10Y 3.16%   
VIX 27.75 +1.66 +6.36% 

It should be apparent that inflation is not going away anytime soon. In fact, there are arguments that the Fed is so far behind that it needs to do more just to catch up let alone get ahead of it. 

Traders are now pricing in three 50 basis point hikes at the next three meetings. Some are pricing in 75 basis points at one of these meetings. 

Tech stocks bore the brunt of the selling, as I have pointed out many times, higher rates affect tech stock valuations.  

The S&P is now a whisker away from the bear market territory. What we have not seen is limit down days, which typically happens when markets are vulnerable.  

Unfortunately, we probably need limit down days before we can call an end to this negative sentiment otherwise, we could just drift lower week after week in a slow and painful manner. 

We could probably also see days of optimism like we have recently, but until inflation comes down, these up days will be met with sellers. 

Continue to prepare for more volatile days ahead. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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