The major domestic equity indexes closed out the trading day on Wednesday down slightly, with bank stocks declining as prospects of an interest rate cut rose and energy shares fell along with oil prices.
The S&P 500 energy index closed out the trading day down 1.4%, the most among the 11 S&P sectors, as demand worries drove domestic crude prices down 4%. The day’s losses made energy the worst-performing S&P 500 sector year-to-date.
A report from the Labor Department indicated that consumer prices rose 0.1% in May, pointing to moderate inflation. This backed the case for a rate cut by the Federal Reserve.
Banking stocks, which tend to benefit from higher interest rates, fell 1.4%, with the broader financial sector down 1%.
Nonetheless, there is still hope among many that the Fed will act to counter a slowing global economy due to the escalating trade war with China. That in turn may have sparked a rally in stocks this month. The S&P 500 index is up 4.6% so far in June.
Fed policymakers will meet on June 18-19. Markets have priced in at least two rate cuts by the end of 2019. Fed fund futures imply around an 80% probability of an easing in rates as soon as July.
Investors are reducing exposure to stocks after the recent rally and as they brace for the Fed meeting.
S&P 500 utilities, which are positively affected by falling rates, was the day’s best performing sector, rising 1.3%.
Lingering worries on the trade front weighed on sentiment, a day after President Donald Trump said he was holding up a deal with China and had no interest in moving ahead unless Beijing agrees to four or five major points.
Less than three weeks before proposed talks between the United States and Chinese leaders, sources say there has been little preparation. Trump said a deal could be reached, but again threatened to increase tariffs on Chinese goods unless that happens.
Semiconductor stocks, which receive sizeable revenue from China, declined on Wednesday. The Philadelphia Semiconductor index was down 2.3%. Micron Technology, Applied Materials and Lam Research all fell more than 5% each.
Facebook was down 1.7% after the Wall Street Journal reported the social media giant uncovered emails possibly connecting Chief Executive Officer Mark Zuckerberg to potentially problematic privacy practices.
Approximately 5.98 billion shares changed hands on the major domestic equity exchanges, as compared to an 6.88 billion share average over the peast 20 trading days.
Consumer Prices Muted
According to a report released by the Labor Department on Wednesday morning, consumer prices were muted in May, pointing to moderate inflation that together with a slowing economy could increase pressure on the Federal Reserve to cut interest rates this year.
However, there were some pockets of inflation, with rents and healthcare costs rising solidly, which could buy the Fed some time before easing monetary policy.
Fed policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions, slowing growth and a sharp step-down in hiring in May that has led financial markets to price in at least two interest rate cuts by the end of 2019. A rate cut is not expected next Wednesday.
The consumer price index edged up 0.1% last month as a rebound in the cost of food was offset by cheaper gasoline, the government said. The CPI gained 0.3% in April.
In the 12 months through May, the CPI increased 1.8%, slowing from April’s 1.9% gain. If you exclude the volatile food and energy components, the CPI nudged up 0.1% for the fourth straight month.
The so-called core CPI was held down by a sharp decline in the prices of used cars and trucks as well as motor vehicle insurance. In the 12 months through May, the so-called core CPI rose 2.0% after advancing 2.1% in April.
The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, increased 1.6 percent in the year to April after gaining 1.5% in March. Data for May will be released later this month. The core PCE price index has been running below the Fed’s 2% target this year.
Gasoline fell 0.5% in May after rising 5.7% in April. Food prices rebounded 0.3% in May after dipping 0.1% in the prior month. Food consumed at home increased 0.3% last month.
Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3% in May after rising 0.3% in April.
Healthcare costs increased 0.3%, matching April’s rise. The solid increase in healthcare costs at both the consumer and production levels last month suggests a pickup in the core PCE price index in May.
The cost of hospital services increased 0.5% in May and the cost of doctor visits ticked up 0.1%. But the prices for prescription medication fell 0.2%.
Apparel prices were unchanged in May after tumbling 0.8% in the prior month. They had declined for two months in a row after the government introduced a new method and data to calculate apparel prices.
Prices for used motor vehicles and trucks tumbled 1.4%. That was the largest drop since last September and marked the fourth straight monthly decrease. The cost of motor vehicle insurance fell 0.4%, the most since May 2007. There were also decreases in the cost of recreation.
However, prices for airline tickets, household furnishings and new vehicles rose last month. Household furnishings are likely to trend higher in the coming months because of the additional tariffs of up to 25% on $200 billion of Chinese goods.
CEO Confidence at Lowest Level
Confidence among chief executive officers of large corporations cooled for a fifth straight quarter to the lowest level since Trump took office but remains high, a Business Roundtable survey showed.
The lobbying group’s CEO Economic Outlook index fell 5.7 points to 89.5 in the second quarter, the lowest since the fourth quarter of 2016, according to the report released Wednesday. However, the results remain above the gauge’s historical average of 82.6 and well above the 50-point threshold signaling expansion.
Jamie Dimon, CEO of JPMorgan Chase. and chairman of Business Roundtable, said that CEO plans for hiring and capital investment remain healthy, but uncertainty about U.S. trade policy, softening global growth conditions and inaction on other pressing public policy issues are a concern.
The data are based on a survey of 127 CEOs conducted from May 16 to June 3. During that period, tensions between the U.S. and two of its largest trading partners — China and Mexico — intensified.
Sales expectations also fell to the lowest point of the Trump’s presidency, the survey showed.
Plans for capital investment and hiring both dropped to the weakest levels since 2017.
CEOs projected a 2.6% expansion in the economy this year, up from a 2.5% estimate in the first quarter.
The overall measure of CEO confidence has eased each quarter since reaching a record high in the first quarter of 2018.