Previous inflation data have influenced Federal Reserve decision-making.
Daniel Slim/AFP via Getty Images
U.S. stocks closed down and bond yields jumped after the government posted a higher-than-expected inflation number Tuesday. On the corporate front, earnings season got under way with banking heavyweights reporting results.
The Dow Jones Industrial Average fell 107 points, or 0.3%, while the S&P 500 dropped 0.35% and the Nasdaq Composite declined 0.4%. The Dow, S&P 500, and Nasdaq all set fresh highs on Monday.
U.S. consumer prices rose 5.4% in June from a year ago, above expectations of 4.9% and the largest increase since 2008. A bulk of the inflation came from price increases in services like airfares and hotels as well as used cars, according to Morgan Stanley economists.
Bond yields spiked in the afternoon. The 10-year Treasury yield rose to 1.41% from 1.35%, while the two-year yield rose to 0.27% from 0.23% in the morning. Recently, stocks have sold off on lower yields, which indicate lower long-term inflation and economic growth, and risen on higher yields. But fast—not gradual— jumps in yields can cause stocks to fall because higher yields reduce the value of future profits. Earlier this year, quick jumps in bond yields caused harsh selling in stocks.
Partly driving the pop in treasury yields was a treasury bond auction with weak demand. Bond yields rise when prices fall. Demand for the newly offered 30-year Treasury bond Tuesday was its second weakest since August 2020, writes Peter Boockvar, chief investment officer at Bleakley Advisory Group.
This also reflects that investors are acknowledging the hot inflation. Usually, higher inflation brings about higher bond yields. “The hot CPI number dissuaded an aggressive bid for the [bond] auction,” says Boockvar.
Importantly, hot inflation this year hasn’t always moved bond yields higher. To be sure, the 10-year Treasury yield fell to 1.25% last week from a 2021 peak of 1.75% in late March. But inflation beat expectations enough Tuesday to catch investors’ attention, Boockvar says.
In Asia, Tokyo’s Nikkei 225 rose 0.5%, while Hong Kong’s Hang Seng climbed 1.6%. The Shanghai Composite lifted 0.5%. The pan-European Stoxx 600 was little changed.
The price of WTI Crude oil rose 1.61% to $75.29 a barrel.
JPMorgan Chase & Co. (ticker: JPM) stock fell 1.4% after the company reported a profit of $3.78 a share, beating estimates for $3.21 a share, on revenue of $31.4 billion, above expectations for $29.9 billion.
Goldman Sachs Group (GS) stock fell 1% after the bank reported quarterly earnings of $15.02 a share, beating estimates for $10.24, on revenue of $15.4 billion, above expectations for $12.17 billion.
PepsiCo (PEP) stock rose 2.3% after the beverage giant said it earned $1.72 a share in the latest quarter, beating estimates for $1.53, on sales of $19.2 billion, above expectations for $17.9 billion.
Nokia (NOK) stock climbed after the Finnish telecommunications group said it expects to revise upwards its prior guidance for 2021 when it reports quarterly earnings at the end of the month. The U.S.-listed shares in Nokia were up 11.4%.
Boeing (BA) dropped 4.2%, even after the stock was upgraded to Peer Perform from Underperform at Wolfe Research.
United Airlines Holdings (UAL) stock dropped 4.2% after getting downgraded to Hold from Buy at Argus.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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