Another hot reading of inflation kept the bulls pinned to the ground Tuesday. All eyes now are on tomorrow’s conclusion of the Federal Reserve’s latest policy meeting, where America’s central bank is expected to raise its benchmark interest rate once more.
The Bureau of Labor Statistics reported this morning that U.S. producer prices rocketed 10.8% year-over-year (and 0.8% month-over-month) in May, driven in large part by high energy prices. That was a higher MoM rate than April’s revised 0.4%, and roughly around economist expectations.
“This report adds to evidence of price pressures remaining elevated across the board, suggesting more near-term inflation,” says Barclays economist Pooja Sriram.
In other words, there’s nothing to suggest that the Federal Reserve will back off from its projection that it will raise the Fed funds rate by another 50 basis points on Wednesday. In fact, Wall Street is increasingly betting they’ll go farther.
“The Fed is suggesting that they are willing to induce a recession to prevent the inflation surge,” says Gene Goldman, chief investment officer of Cetera Investment Management. “The CPI and PPI reports will make the Fed raise rates more than markets had anticipated just last week [75 basis points instead of 50]. This is analogous to the Fed ripping off the band-aid and raising rates fast upfront (instead of slowly pulling it off).”
Goldman adds, however, that the key thing to watch is the terminal rate – while the Fed might get more aggressive now, it also might end up raising rates by less later in the rate-hiking cycle.
The S&P 500 dug a little deeper into bear-market territory, declining 0.4% to 3,735, while the Dow Jones Industrial Average was off 0.5% to 30,364. The Nasdaq Composite actually managed to finish in positive territory, with a modest 0.2% gain to 10,828.
Oracle (ORCL, +10.4%) was one of the trading session’s brightest spots, as the enterprise software firm easily topped quarterly profit estimates and delivered better-than-expected guidance for its upcoming fiscal year.
Other news in the stock market today:
The small-cap Russell 2000 slipped 0.4% to 1,707.
U.S. crude oil futures shed nearly 1.7% to settle at $118.93 an ounce.
Gold futures fell 1% to end at $1,813.50 an ounce.
Bitcoin’s slide continued, with the cryptocurrency off 4.3% to $22,156.03. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
The recent selloff in cryptocurrencies forced Coinbase Global’s (COIN, -0.8%) hand, with the firm announcing today it is slashing its global workforce by 18%. “We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” Brian Armstrong, CEO and co-founder of Coinbase, wrote in a blog post. “As we operate in this highly uncertain period in the world, we want to ensure we can successfully navigate a prolonged downturn. Our team has grown very quickly (>4x in the past 18 months) and our employee costs are too high to effectively manage this uncertain market. The actions we are taking today will allow us to more confidently manage through this period even if it is severely prolonged.”
FedEx (FDX) stock spiked 14.4% after the delivery giant said it will hike its quarterly dividend by 53% to $1.15 per share. FDX also said it is adding three new board members – two immediately and one down the road – as part of an agreement with activist investor D.E. Shaw. “The FDX bear cases are largely tied to 1) resistance to structural change, and 2) macro risks in businesses with high operating leverage,” says Susquehanna Financial Group analyst Bascome Majors, who has a Neutral (Hold) rating on the stock. “Today’s announcement of a board refresh and other governance updates tied to a cooperation agreement with activist investor D.E. Shaw is a significant shift to the ‘won’t change’ narrative, though admittedly can’t help their cyclical businesses outrun the macro.”
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“It’s better to miss the bottom of a market and buy on the way up than to guess where the exact bottom is.”
So says George Ball, chairman of investment firm Sanders Morris Harris, who adds that “new money should be patient money” now that investment psychology has decidedly shifted to the negative side of things.