Although the Fed's preferred inflation figure did not worsen in May, suggesting that inflation is peaking, it was not enough to give stock markets a bullish push.
The Wall Street indices experienced declines yesterday due to several factors.
One of the factors is the date (the end of the quarter), the date on which investment portfolio adjustments are usually made and which can cause, as was the case, movements that do not have to be adjusted to fundamental reasons. The session was extremely volatile, with continuous highs and lows that did not respond to any other reason than the flow of purchases and sales derived from portfolio adjustment operations.
Another factor that negatively influenced the markets is the increasingly widespread perception among investors that a period of recession is looming. Contributing to this sentiment was the publication of personal consumption, which fell significantly in May. Remember that consumption is the main component of the gross domestic product figure.
Because of this high-risk aversion market sentiment, US Treasuries were bought along the curve bringing the 10-year bond yield below the 3% zone. Ultimately, a drop in Treasury bond yields like the one that occurred yesterday would have been a positive factor for the stock markets, as they indicate that the market expects lower interest rate hikes from the Federal Reserve.
It should be remembered that the rate hikes, and the tightening of monetary policy, have been the main causes that explain the deep fall in the stock markets since the beginning of the year.
Therefore, it can be said that yesterday, the last day of the semester, investors' concerns turned from inflation to economic growth.
This can change from day to day. If inflation is contained, and there are reasons to think so after the deep falls in much of the raw materials and freight costs, the effect of interest rates on the valuation of stocks should not be so detrimental as the market has already discounted.
From now on, the market will focus on economic data as leading indicators of the economy and growth.
Commodities fell across the board, from agricultural products such as Wheat to metals such as Copper, passing through energy ones such as Natural Gas, which experienced a drop of almost 13%. Oil, although OPEC has not shown signs of an increase in production, it turns lower and approaches the critical area of $104. Below this level, it would have a clear path to the sub-$100 level from a technical perspective.
Sources: Bloomberg, Reuters