U.S. stocks slip following economic data as investors await Fed

What’s driving the market?

Stocks drifted lower after a mixed bag of economic data did little to shake the wait-and-see attitude ahead of the outcome of a two-day Fed policy meeting that concludes Wednesday.

The U.S. May producer-price index rose 0.8% in May, pushing prices up 6.6% year over year. Separately, retail sales dropped 1.3% in May.

While most economic data reflects an economic recovery from the pandemic, reports continue to offer both positives and reasons for caution, said Greg Bassuk, chief executive of AXS Investments, in a phone interview.

While retail sales fell more than expected in May, a look under the hood of the data shows spending is showing signs of rotating back to services, which is supportive of the notion of a broader reopening of the economy, he said.

Looking toward the end of the year, “we’re doubling down on our confidence in what we call the rebalancing trade,” Bassuk said, which consists of a continued, longer term rotation out of technology and some stay-at-home stocks that were highfliers last year.

In other data, the New York Fed’s Empire State factory index fell to 17.4 in June from 24.3 a month earlier. Separately, the Federal Reserve said industrial production rebounded 0.8% in May due to a strong gain in auto production. The National Association of Home Builders’ monthly confidence index slipped to 81 in June from 83 in May. That’s the lowest level in nine months.

So far the U.S. stock market has been trading as if higher inflation in the recovery phase from the COVID pandemic will be a short-lived phenomenon, caused temporarily by easing of economic restrictions and supply-chain bottlenecks.

The big fear is that the Fed will be forced to scale back its bond-buying program sooner than its initial projections and eventually lay the groundwork for raising benchmark interest rates, which currently stand at a range of 0% to 0.25%.

“The most obvious starting point for the Federal Reserve to eventually begin paring back its stimulus is the $40 billion monthly purchases of mortgage-backed securities,” Danielle DiMartino Booth, chief executive officer and chief strategist of research firm Quill Intelligence, said in a note Tuesday.

“Transitory inflation is occurring in parts of the market, particularly commodities, as prices for corn, copper and lumber are well off their highs, but housing inflation is a thornier issue for the Federal Reserve, given the sector’s dominance in the economy,” said DiMartino Booth, who previously was an advisor to former Dallas Fed president Richard Fisher. “While the Fed will likely reiterate its transitory stance on inflation at Wednesday’s policy meeting, it’s becoming clear that the surge in housing and gasoline prices, the two most visible costs to households, is anything but transitory.”

Meanwhile, a survey of global fund managers conducted by Bank of America found that nearly three-quarters of participants think the current spike in consumer prices will recede soon. Esty Dwek, head of global market strategy at Natixis Investment Managers, told MarketWatch in an interview Tuesday that she thinks inflation is transitory as it’s tied to pent-up demand, supply-chain bottlenecks and comparisons to last year’s costs that dropped in the pandemic.

“Inflation will probably run slightly higher than we have seen in the previous decade,” said Gargi Chaudhuri, BlackRock Inc.’s head of iShares investment strategy for the Americas, in a phone interview Tuesday. While part of the recent rise in prices will be short-lived, as it stems from the reopening, some production costs may remain higher over the medium term, according to Chaudhuri. 

That’s because companies may seek more resilient suppliers in the wake of the supply-chain disruptions seen in the pandemic, she said. “Maybe we need to move away from this just-in-time manufacturing.”

As for the FOMC meeting, Chaudhuri said she will be looking for signals from the Fed on any tapering discussions while paying close attention to how Chairman Jerome Powell characterizes inflation. In her view, reducing its asset purchases down the road would be a sign of the Fed’s confidence in the economic recovery and shouldn’t result in a market tantrum.

The central bank has been “very careful” in its approach toward tapering, she said. “I don’t have any expectation that the Fed is going to sound hawkish tomorrow.”

See: 4 things to watch for when the Fed meets Wednesday

Which companies are in focus?

• AMC Entertainment Holdings
  AMC,
  +3.42%
   stock has more than doubled in the 10 trading days so far in June. Executives and directors of the movie-theater chain have stepped up stock sales to $13 million for the month to date. Shares were up 4.9% on Tuesday afternoon.
• Blucora Inc. BCOR raised its second-quarter and full-year financial outlook on Tuesday, citing a “much stronger” than anticipated final two weeks of the tax season. Shares rose 7.7%.
• Sage Therapeutics Inc. SAGE and partner Biogen Inc. BIIB said a Phase 3 study of their major depressive disorder (MDD) treatment met its primary endpoint, as it showed “statistically significant improvement” in symptoms compared with placebo. Sage shares dropped 17.8%, while Biogen stock was off 2.1%.
• Shares in aircraft manufacturers Airbus and Boeing were in focus on Tuesday, after news of a settlement of a long-running trade dispute between the European Union and U.S. over state aid to the two groups. Airbus AIR stock closed 0.7% higher in European trading, while Boeing BA shares were up 1%.

How are other assets faring?

• The yield on the 10-year Treasury note TMUBMUSD10Y was about 1.5%. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was little changed.
• Oil futures CL00 advanced, with West Texas Intermediate crude for July delivery up about 1.9%. Gold futures GC00 fell 0.5% to settle at $1,856.40 an ounce.
• European equities rose, with the pan-Continental Stoxx Europe 600 SXXP up 0.1% for a fresh record close. London’s FTSE 100 UKX  close 0.4% higher.
• In Asia, the Shanghai Composite SHCOMP closed down 0.9% higher, Hong Kong’s Hang Seng Index HSI ended 0.7% lower and Japan’s Nikkei 225 NIK gained 1%.

—Mark DeCambre contributed to this report.