Stocks turned lower on Wednesday after the Consumer Price Index (CPI) report showed U.S. inflation accelerated in June by more than forecasted. The consumer price index rose 9.1% from a year earlier, the largest gain since the end of 1981, reflecting higher gasoline, shelter, and food costs. Economists had projected an 8.8% year-over-year increase. Core CPI, which excludes food and energy, increased 5.9% year-over-year, also above the forecast of 5.8%, but down from the 6.0% reading from May. Bond yields increased on the news with the pricing pressures keeping the Federal Reserve on track to raise rates by 75 basis points at the upcoming meeting in two weeks. According to CME data, futures markets now are pricing in about a 40% chance of a 100-basis-point increase at the July 26-27 meeting, with the year-end funds rate now expected to be in the 3.5% range.
For the rest of the week, investors will get a glimpse at other measures of inflation with the Producer Price Index (PPI) data due out Thursday. Consensus is for PPI ex-food and energy to reflect softer but still elevated core goods inflation, while headline PPI is expected to increase by 0.8% for June. In addition, Retail sales data will be released Friday, where investors will look for signs of continued strength of the U.S. consumer.
Earnings season kicks off this week with several key financial institutions reporting second-quarter results. For the second quarter, the estimated earnings growth rate for the S&P 500 is 4.3%. Investors will keep a close eye on how corporations are doing from a profit and margin perspective amidst higher inflation and softer sentiment.
Source: GSAM, CNBC, JPMorgan