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40-year High Inflation, Record Low Sentiment Sinks Stocks

U.S. equities plunged in today's session, adding to yesterday's drop, and posting yet another week of solid losses. The tumble in the markets came amid heightened inflation concerns following an unexpected acceleration in domestic consumer price inflation for May. Worries over the persistent rise in prices have weighed on confidence and was a catalyst in today's record low plunge for the preliminary June University of Michigan Consumer Sentiment Index. Treasuries traded lower in the wake of the data, with yields rising and the curve flattening amid ramped-up expectations that the Fed will be forced to get more aggressive. The U.S. dollar rallied, crude oil prices fell, and gold was sharply higher. In equity news, DocuSign missed earnings estimates and lowered its billings guidance, and Advanced Micro Devices offered a positive long-term outlook, but warned of a down PC market this year. Europe saw widespread losses as the markets grappled with tighter monetary policies on both sides of the pond, and Asia finished mostly lower, but China rebounded.

The Dow Jones Industrial Average tumbled 880 points (2.7%) to 31,393, the S&P 500 Index dropped 117 points (2.9%) to 3,901, and the Nasdaq Composite plunged 414 points (3.5%) to 11,340. In moderate volume, 4.8 billion shares of NYSE-listed stocks were traded, and 5.1 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.84 lower to $120.67 per barrel. Elsewhere, the gold spot price was up $22.40 to $1,875.20 per ounce, and the Dollar Index gained 0.9% to 104.16. Markets were lower for another week, as the DJIA lost 4.9%, the S&P 500 decreased 5.1%, and the Nasdaq Composite fell 5.6%.

DocuSign Inc. (DOCU $66) reported adjusted Q1 earnings-per-share (EPS) of $0.38, well below the $0.46 FactSet estimate, with revenues rising 25.0% year-over-year (y/y) to $589 million, above the Street's forecast of $583 million. The e-signature company's Q1 billings came in above estimates, but it noted a challenging and dynamic global environment. As such, DOCU reaffirmed its full-year revenue guidance but it had a midpoint below expectations, and it lowered its outlook for billings. Shares are fell nearly 25%.

Advanced Micro Devices Inc. (AMD $95) reaffirmed its current-year guidance at its investor day, and said its long-term forecast calls for 20% annual growth in revenues over the next three to four years, a growth rate that the semiconductor company said will increase faster than the broader market for chips. However, the company did note that it expects a down PC market this year. Shares traded lower.

The S&P 500 continued to be choppy this week amid the plethora of headwinds and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest Mid-Year Outlook: U.S. Stocks and Economy, how sharp, countertrend rallies may continue this year, but aggressive Fed policy, the turning of the liquidity tide, and slower economic growth will likely keep pressure on stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary, including our 7 Investing Strategies to Prepare for Bear Markets, on our nsights & Education page, and you can follow us on Twitter at @SchwabResearch.

Consumer price inflation comes in hotter than expected, June consumer sentiment tumbles

The Consumer Price Index (CPI) (chart) rose 1.0% month-over-month (m/m) in May, above the Bloomberg consensus estimate calling for a 0.7% gain, and compared to April's unrevised 0.3% increase. The core rate, which strips out food and energy, increased 0.6% m/m, north of forecasts calling for a 0.5% rise and matching April's unadjusted increase. Compared to last year, prices were 8.6% higher for the headline rate, above estimates calling for the rate to match the prior month's unrevised 8.3% rise. The core rate was up 6.0% y/y, north of projections of a 5.9% gain, but down from April's unrevised 6.2% rise.

Amid the intense inflationary environment, the preliminary University of Michigan Consumer Sentiment Index (chart) for June showed that sentiment fell much more than expected, dropping to 50.2 from May's final reading of 58.4, and versus estimates calling for a dip to 58.1. The index fell to a record low as the expectations component of the report dropped sharply, as did the current conditions portion, which also posted a record low.

Director of the survey Joanne Hsu said, "Throughout the survey, consumers signaled strong concerns that inflation will continue to erode their incomes, and that factors they cited are unlikely to abate soon." She added that, "While consumer spending has remained robust so far, the broad deterioration of sentiment may lead them to cut back on spending and thereby slow down economic growth." The 1-year inflation expectation ticked higher to 5.4%—the highest since 1981—from 5.3% in May, where it was expected to remain. The 5-10 year inflation outlook moved higher for the first time in five months, rising to 3.3% from 3.0% in the prior month.

Treasuries were lower following the inflation data and amid continued choppy action as markets grappled with the implications on Fed monetary policy, which is tightening amid the backdrop of slowing economic growth.

As the Fed launches a series of rate hikes to try to cool off inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' 2022 Mid-Year Outlook: Fixed Income in which she discusses how returns should be better for fixed income investors in the second half of 2022, now that interest rates have reset higher. However, we still expect volatility to remain high as central banks shift away from easy-money policies. Be sure to follow Kathy on Twitter: @KathyJones.

The yield on the 2-year Treasury note was up 24 basis points (bps) to 3.05%, the yield on the 10-year note gained 12 bps to 3.16%, and the 30-year bond rate advanced 3 bps to 3.20%.

Europe lower as markets digest yesterday's ECB decision and U.S. inflation data

European equities were solidly lower to close out the week, as the markets continued to digest yesterday's monetary policy decision from the European Central Bank (ECB), in which it said it will end its asset purchase program and raise its benchmark interest rate by 25 bps in July. The ECB also noted that if inflation remains high, it could raise rates by a higher increment in September. Moreover, the markets sifted through the May consumer price inflation report out of the U.S. that showed pricing pressures climbed more than expected, setting a new 40-year high. The ECB's decision and U.S. inflation data appeared to exacerbate recession concerns as monetary policies tighten and expectations are rising that the Fed may need to be more aggressive. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA offers his 2022 Mid-Year Outlook: Global Stocks and Economy, discussing how economic uncertainty may have peaked in the first half of 2022 but could still contribute to volatility and affect market performance for the remainder of the year. You can follow Jeff on Twitter: @JeffreyKleintop. In economic news, Italy's industrial production unexpectedly rose in April, while the Bank of England raised its 12-month inflation forecast. The euro and British pound were sharply lower versus the U.S. dollar on the heels of the U.S. inflation data. Bond yields in the Eurozone and the U.K. gained ground with rates in Italy extending yesterday's ECB-induced spike.

The U.K. FTSE 100 Index was down 2.1%, France's CAC-40 Index fell 2.7%, Germany's DAX Index declined 3.1%, Italy's FTSE MIB Index plunged 5.2%, Spain's IBEX 35 Index tumbled 3.7%, and Switzerland's Swiss Market Index traded 2.1% lower.

Asia mostly lower ahead of U.S. inflation report, which comes after some key China data

Stocks in Asia were mostly lower as the markets focused on a host of economic reports out of China, while likely trading with some caution ahead of today's key consumer price inflation report out of the U.S. However, Chinese markets bucked the trend, rebounding from yesterday's decline that came as China renewed some COVID-related lockdowns for testing in Shanghai as cases rebounded. The move comes as restrictions have eased as of late, leading to signs of a pickup in economic activity. China reported that its wholesale price inflation slowed noticeably in May, but remained elevated, while its consumer price inflation held steady amid expectations to tick higher. Also, just as the markets were closing, China's aggregate financing—a measure of total credit issued—for May accelerated solidly and topped forecasts, while its new yuan loans increased by a smaller amount than anticipated. Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output.

A wide number of headwinds continue, with inflation concerns across the globe remaining the main source of uneasiness for the markets, and fostering uncertainty regarding a potential global recession. Monetary policies continue to tighten despite the economic uncertainty, with central banks in India and Australia raising rates more than expected this week, following a recent 50 bp rate hike from the U.S. However, China has loosened monetary policy and deployed stimulus measures to try to support the economy that has been disrupted by the lockdowns. In other economic news, the markets continued to digest late-yesterday's preliminary machine tool orders out of Japan that decelerated in May but held onto over a 20.0% gain y/y, while in the final minutes of the day, India reported a much higher than expected rise in industrial production for April.

Stocks continue to fall as inflation festers and recession chatter heats up

The S&P 500 dropped for the ninth week in ten as the markets remained uneasy and conviction continued to be held hostage by concerns inflation may not be peaking and will force the Fed to act even more aggressive in tightening monetary policy. Chatter about a potential recession heated up with a larger-than-expected rise in weekly initial jobless claims adding some kindling. Adding to the recession debate, crude oil posted a seventh-straight weekly gain—briefly breaching $122 per barrel—and gas prices hit a record high to dampen the outlook for consumer spending and corporate profit margins. All sectors were in the red led by the cyclically-natured Financials and Consumer Discretionary sectors amid the concerns about the impact of a potential recession and the inflationary pressures facing the economy. The interest-rate sensitive Real Estate and Information Technology sectors also led the markets lower, while the Energy sector outperformed but still finished in the red amid the uneasiness in the markets and the ensuing rally in the U.S. dollar, which recovered to approach its recent 20-year high.

Next week, the economic calendar will continue to develop the May inflation picture, with the releases of the Producer Price Index (PPI) and the Import Price Index, while sentiment indicators will hit the tape, courtesy of the NFIB Small Business Optimism Index for May and the NAHB Housing Market Index for June. Housing construction activity will also come into focus, with the release of May housing starts and building permits, as well as weekly MBA mortgage applications. We will get some timely reports in the form of June regional manufacturing reports out of New York and Philadelphia, jobless claims for the week ended June 11, and the May Leading Index. Given the backdrop of high inflation and plunging consumer sentiment, the May retail sales report may garner heavy attention. However, the headlining event of next week is the Federal Open Mark Committee's (FOMC) monetary policy decision, where it is expected to raise the fed funds rate by 50 bps and provide its updated Summary of Economic Projections (SEP). The press conference following the decision will also likely be paid close attention to as the markets try to determine whether Friday's hotter-than-expected consumer price inflation report put another 50-bp rate increase on the table for September.

Next week's international economic calendar will also be robust, with reports worth noting including: Australia—consumer confidence and employment change. China—medium-term interest rate change, industrial production, retail sales, and new home prices. India—CPI, PPI, and trade balance. Japan—the Bank of Japan monetary policy decision, core machine orders, and trade balance. Eurozone—industrial production, trade balance, construction output, and CPI, along with German investor confidence. U.K.—the Bank of England Monetary policy decision, monthly GDP, construction output, industrial and manufacturing production, and retail sales. Get Schwab's view on markets and economy.


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