U.S. stocks hover near records after hot CPI data, as big banks kick off earnings season

What’s driving the market?

“The knee jerk reaction to the hotter than expected CPI data today was negative, but the market has recovered from the early dip,” said Thomas H. Kee, chief executive of Stock Traders Daily, in a note.

The U.S. consumer-price index showed a 0.9% June rise. The core reading, which strips out volatile food and energy costs, also rose 0.9%. Both measures were expected to show a 0.5% rise.

Year over year, the headline CPI was up 5.4% in June, while the core rate, excluding food and energy costs, rose 4.5% year-over-year, the sharpest move for that measure since September 1991 and well above the estimate of 3.8%.

While the data will stir the debate about whether the Federal Reserve has fallen behind the curve when it comes to inflation by insisting that rising prices will be a “transitory” phenomenon, investor fears of a bout of runaway inflation appear to remain in check.

Kee argued that investors generally look for inflation, much like earnings growth, to peak soon.

“Reasonably, hot inflation data should still be expected, but if inflation is akin to the upcoming change in earnings growth rates for the market, the next installment of CPI will be tamer,” he wrote. “If the CPI data is this hot next time, it will be a more material concern.”

As equities edged lower, the U.S. Treasury yield curve flattened, with investors selling short- and medium-dated Treasurys but buying longer-dated notes, keeping longer date yields steady.

While analysts have debated the fate of the so-called reflation trade, Nancy Davis, founder of Quadratic Capital Management, said she believes investors have only just started to think about inflation.

“The 10-year Treasury yield is significantly below the rate of inflation and a continuation of that dynamic would likely create challenges for fixed income investors,” she said, in emailed comments.

“An even bigger risk for investors, more so than inflation, is stagflation, which would bring rising consumer prices without much economic growth. Stagflation could hurt bonds and stocks at the same time,” she said, adding that the stagflation risk raises the importance of uncorrelated assets in an investment portfolio.

Soaring inflation stems in large part from supply disruptions as demand soars with the reopening of the economy, but if prices pressures don’t ease in the near future it could put more stress on the U.S. recovery, some analysts fear.

Members of the Federal Reserve so far have insisted that inflation will wane soon once the U.S. and global economies regain a more normal footing, citing price pressures that have been mostly tied to temporary shortages that will fade away as supply catches up to demand.

In other U.S. economic data Tuesday, the National Federation of Independent Business said its small-business index rose in June to the highest level in eight months. The index was up 2.9 points to 102.5 and topped 100 for the first time since November. It had fallen in May for the first time this year.

Stock-market investors were also seeking insights from the start of the second-quarter earnings reporting season.

Results from banking giants JPMorgan Chase & Co.
JPM,
-2.72%
and Goldman Sachs Group Inc.
GS,
-1.61%
came in early Tuesday, both topping forecasts.

JPMorgan Chase were lower after reporting profit that more than doubled but a fall in revenues. Goldman shares rose in early action after topping profit and revenue expectations and boosting its dividend by 60%, but subsequently turned south. Both banks are constituents of the Dow Jones Industrial Average.

Meanwhile, the president of the St. Louis Fed James Bullard said Tuesday the Federal Reserve should start reducing the stimulus it provides to the U.S. economy, though he added the reduction didn’t need to start immediately. “I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,” he told the The Wall Street Journal in an interview published Tuesday.

Check out: MarketWatch’s Need to Know column

Which companies are in focus?

• The Centers for Disease Control and Prevention said it has received reports of 100 people who got the Johnson & Johnson JNJ shot developing Guillain-Barré syndrome, an immune system disorder that can cause muscle weakness and occasionally paralysis. Shares were down 0.2%.
• Shares of Conagra Brands Inc.
  CAG,
  -4.04%
  fell more than 4% after the food company warned of inflation pressure for the beginning of fiscal 2022. 
• Shares of PepsiCo Inc. PEP were up 2.5% after the beverage and snacks company reported second-quarter profit and revenue that rose well above expectations and provided an upbeat full-year outlook.
• Canadian cannabis company Organigram Holdings Inc. OGI posted a narrower loss for its fiscal third quarter than in the same period a year ago as revenue topped estimates. Shares were up 10.5%.
• Altus Power Inc., the Connecticut-based clean electrification ecosystem company, is going public through a merger announced Tuesday with special-purpose acquisition company CBRE Acquisition Holdings Inc. CBAH, a deal that values the combined company at $1.58 billion.
•  Boeing Co.
  BA,
  -3.69%
  shares slid more than 3% after the aerospace giant said it has identified additional work that is required on its undelivered 787s, delaying their delivery through the rest of 2021.

What are other markets doing?

• The yield on the 10-year Treasury note was down 0.8 basis point at 1.355%.
• The ICE U.S. Dollar Index
  DXY,
  +0.31%,
  a measure of the currency against a basket of six major rivals, was up 0.3%.
• Oil futures edged higher, with the U.S. benchmark
  CL00,
  +0.35%
  up 0.1%, while gold futures
  GC00,
  +0.34%
  also ticked higher, rising 0.4%.
• European equities edged lower, with the Stoxx 600 Europe
  SXXP,
  -0.06%
  and London’s FTSE 100
  UKX,
  -0.06%
  both down 0.1%.
• In Asia, the Hang Seng Index
  HSI,
  +1.63%
  jumped 1.6% in Hong Kong, while the Shanghai Composite
  SHCOMP,
  +0.53%
  and Japan’s Nikkei 225
  NIK,
  +0.52%
  each advanced 0.5%.