Inflation, recession concerns weigh on S&P 500, Dow, Nasdaq

Jul. 13, 2022 4:04 PM ETS&P 500 Index (SP500), COMP.IND, DJIBy: Kim Khan, SA News Editor184 Comments

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Stocks finished with modest losses on Wednesday, adding to the downtrend that has marked the week so far, as investors weighed a hotter-than-expected read on inflation and updated information about the economy from the Federal Reserve.

The Dow (DJI) ended -0.7%, the S&P (SP500) closed -0.5% and the Nasdaq (COMP.IND) finished -0.2%.

Looking at the closing numbers, the Dow Jones retreated 208.54 points to conclude trading at 30,772.79. Meanwhile, the S&P 500 slipped 17.02 points to end at 3,801.78. The Nasdaq held up better than the other major averages, carrying a gain into the final minutes of trading. Ultimately, the index closed at 11,247.58, a decline of 17.15 points.

Nine of the 11 S&P sectors finished the session lower, although most of the declines were modest. Communication Services and Industrials were the only segments to stage retreats of more than 1%. Consumer Discretionary was the best performing sector, rising by 0.9%.

In the bond market, longer-term durations saw a decline in yields, while shorter-term instruments experienced a spike, indicating that traders leaned to price in a recession over inflation. The 10-year Treasury yield fell 5 basis points to 2.91%. The 2-year yield rose 9 basis points to 3.13%.

The dollar strengthened and broke through parity with the euro.

Headline June CPI rose 1.3% on the month, topping forecasts of 1.1%. It hit an annual rate of 9.1%. Core CPI rose 0.7%, ahead of the 0.6% consensus and was up 5.9% y/y.

"Looking forward, inflation will come down over the next couple of months," Mohamed El-Erian tweeted. "That’s the good news. Less good is that a third wave of inflationary pressures is building and will be unleashed if the Fed doesn’t get its act together quickly."

El-Erian added: "With the first best policy option now long gone due to the first two stages of the ongoing Fed policy mistake, the recession risks are increasing accordingly. This threatens a second big hit for households, especially the most vulnerable segments of our society. And to think that much of this could have been avoided."

The numbers cement at least a Fed hike of 75 basis points this month and markets now see a 41% chance of a full point, according to CME FedWatch. Swap markets are pricing in 82 basis points for the July meeting.

"We remain of the view that core inflation, especially the core PCE, is likely to fall faster than markets expect over the next year, thanks to margin re compression, slower wage gains, lower commodity prices, and the stronger dollar," Pantheon Macro said. "But right now this report will make for very uncomfortable reading at the Fed."

In the afternoon, the Fed released its Beige Book, a collection of anecdotal information from the central bank's various branches. The report showed that U.S. economic activity "expanded at a modest pace" since mid-May, although concerns about a recession also increased.

Among active stocks, Twitter was among the biggest S&P gainers after it filed suit against Elon Musk.

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