U.S. stocks fell on Tuesday to cap a back-and-forth session as investors gear up for a big inflation report Wednesday and the start of third-quarter earnings season.
The S&P 500 (^GSPC) fell 0.6% after failing to retain a gains from an intraday rebound, and the Nasdaq Composite (^IXIC) tumbled 1.1% to a fresh two-year low. The Dow Jones Industrial Average was an outlier — ending 0.1% in the green. Meanwhile, the benchmark 10-year Treasury note came close again to the key 4% level.
Investors are navigating a murky week marked by producer and consumer inflation data and the first reporters of the Q3 earnings period, which include four of the country’s largest banks by assets.
While the Producer Price Index (PPI) is set for release Wednesday, investors have their eyes on the critical Consumer Price Index (CPI) due out Thursday, which is likely to show inflation remained persistently high despite aggressive intervention by the Federal Reserve to slow the economy. Following the release of August’s CPI print on Sept. 13, the S&P 500 plunged 4.3% in its worst day of the year so far.
Analysts at JPMorgan warned in a note on Tuesday that if September’s reading comes in higher than the prior month’s 8.3%, the S&P 500 may drop as much as 5%.
In a rare admission, Federal Reserve Vice Chair Lael Brainard said policymakers must be prudent in lifting rates higher amid global macroeconomic uncertainty as previous hikes still work their way through the economy.
“Moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting to cumulative tightening in order to inform our assessments of the path of the policy rate,” she said Monday at the National Association for Business Economics’ annual meeting, as the U.S. central bank appears to be on pace for a fourth 75-basis-point increase in November.
On Monday, JPMorgan Chief Executive Jamie Dimon in an interview with CNBC said stocks may fall an “easy 20%” from current levels, depending on the economic outcome of the Fed’s actions, and warned also that the U.S. economy may enter a recession by mid-2023.
Across the Atlantic, the Bank of England widened its emergency bond purchases for the second time this week after a sell-off across long-dated gilts on Monday in an effort to stabilize financial conditions.
“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, pose a material risk to U.K. financial stability,” the Bank warned in a statement.
The Bank of England’s move helped prop gilt prices back up but did little to help the slumping British pound as strength in the U.S. dollar powers on and continues to pressure other currencies.
In the U.S., firmness in the greenback resulting from the Fed’s monetary actions has been a pain for Corporate America, lowering sales and profits by stomping on income earned overseas on products purchased with weaker currencies. Currency headwinds have dealt a blow to companies such as Nike (NKE) and FedEx (FDX) in recent weeks and are likely to be cited by others reporting financial results .
“We may hear more in the coming weeks on the pressures an exceptionally strong dollar can have on U.S. exports and thus, earnings of U.S. companies, but dollar strength could also play a role in getting the Fed to ‘back off’ from its tightening policy,” Chris Larkin, managing director of trading at Morgan Stanley’s E*TRADE, said in emailed commentary. “Though even if continued dollar strength eventually contributes to the Fed switching from raising rates to cutting them, the timing of such a pivot remains uncertain, and might not change the downward trajectory of corporate earnings.”
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc