What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed down -2.91%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -2.73%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -3.56%. 

Stocks fell sharply on the unfavorable CPI and consumer sentiment reports, adding to Thursday’s sharp losses when the S&P 500 index plunged by -2.38% and the Nasdaq 100 index fell by -2.74%. 

Friday’s U.S. May CPI data was stronger than expected and added to concerns that the Fed will be forced to raise interest rates aggressively. There is concern the Fed will be forced to put the U.S. economy into a recession by next year to cool inflation to more acceptable levels.

The markets on Friday added expectations for an extra +31 bp of Fed rate hikes by year-end with the 31 bp move in the Dec federal funds futures contract to an implied yield of 3.08%.  That represents expectations for an overall +225 bp rate hike through year-end. The FOMC at its meeting next week is fully expected to raise its funds rate target range by +50 bp to 1.25%/1.50% from the current 0.75%/1.00%.

Friday’s May CPI report of +1.0% m/m and +8.6% y/y was stronger than expectations of +0.7% and +8.3%, respectively.  Friday’s May core CPI of +0.6% m/m and +6.0% y/y was slightly stronger than expectations of +0.5% and +5.9%, respectively.  The headline May CPI rose to a new 40-year high of 8.6% y/y, but the core CPI eased to a 4-month low of +6.0% from April’s +6.3% in April and March’s 40-year high of +6.5%.

The stock market was also undercut by Friday’s news that the University of Michigan’s preliminary-June U.S. consumer sentiment index fell sharply by -8.2 points to a record low of 50.2 (data since 1977). That was much weaker than expectations for a small -0.3 point decline.  The plunge in consumer sentiment increases the risk of a sharp cut-back in consumer spending and a U.S. recession.  Consumers are currently enjoying strong employment income, but are very worried about inflation, sky-high gasoline prices, and a possible recession.

Today’s stock movers…

Stocks in the consumer discretionary and travel/entertainment sectors were hard-hit on Friday with the increased concern about a U.S. recession.  Caesars (CZR) was the biggest loser in the S&P 500 index with a -9.29% drop.  MGM Resorts (MGM) fell -7.40%, Royal Caribbean Cruises (RCL) fell -7.33%, and Host Hotels and Resorts (HST) fell -6.38%. 

U.S.-listed Chinese stocks saw some overnight strength from hopes for a more favorable regulatory climate for Chinese tech stocks, but then fell back as the overall U.S. stock market slid on the unfavorable CPI and consumer sentiment reports. Bloomberg reported earlier this week that China’s regulator is working to revive the IPO for Ant Group, although the regulator on Thursday denied that report.  On Friday, Alibaba Group Holding (BABA) fell -0.05% and Baidu (BIDU) fell -1.81%, but Pinduoduo (PDD) rallied by +2.13%. 

Netflix (NFLX) fell -4.18%, Roblox (RBLX) fell -8.11%, Ebay (EBAY) fell -4.25%, and Frontdoor (FTDR) fell -5.89% after Goldman Sachs cut its ratings on those stocks, partly due to Goldman’s outlook for a weaker economy.

Morgan Stanley downgraded IHeartMedia (IHRT) to underweight from equal-weight and downgraded Lamar Advertising (LAMR) to equal-weight due to reduced advertising spending forecasts for 2023. Iheartmedia on Friday fell -9.99%, and Lamar fell -4.18%.

DocuSign (DOCU) plunged -23.80% after the company’s poor earnings news and subsequent analyst downgrades.

Revlon (REV) on Friday plunged 53% after the news organization Reorg reported that Revlon is preparing to file for bankruptcy.

Across the markets…

Sep 10-year T-notes (ZNU22) on Friday closed sharply lower by -1-035/32 points, and the 10-year T-note yield rose +11.4 bp to a 1-month high of 3.156%.  T-note prices were undercut by the stronger-than-expected U.S. CPI report and expectations for even more Fed tightening through mid-2023.