Stocks traded lower today as yields continued climbing. Yesterday, the 10-year Treasury yield jumped above 3.00% before marching higher again this morning. It hit a daily high of 3.07%, matching a level unseen since May 6th.
This did little to dissuade Big Tech bulls, however, as some major tech names managed to escape the early trading session relatively unscathed. Microsoft (NASDAQ: MSFT) and Google-parent Alphabet (NASDAQ: GOOG) actually gained through noon while others fell. Apple (NASDAQ: AAPL) and Facebook-parent Meta (NASDAQ: FB) both endured significant morning losses.
“There’s a lot of headfakes going on. And unfortunately, we’re not going to get a lot of clean looks at the economy, whether the U.S. economy or certainly the global economy, for quite some time because there’s just so many things that are hard to decipher,” said Truist strategist Michael Skordeles.
Overall, though, the market remained coiled ahead of tomorrow’s critical May Consumer Price Index (CPI) release. At 8:30 am EST, the Bureau of Labor Statistics (BLS) will unveil last month’s inflation print.
Analysts are predicting a +0.7% month-over-month (MoM) increase. By comparison, April’s data showed a +0.3% MoM jump vs. a consensus estimate of +0.2%. It was a small “beat” (or miss, depending on how you looked at it) that didn’t really tip the scales.
This time around, the market’s anticipating that inflation surged in May relative to April. And though the May CPI will undoubtedly beat April’s reading MoM, surpassing the +0.7% MoM consensus estimate seems unlikely, even on the heels of rising energy costs.
Yes, oil was up big in May. WTI Crude, the US benchmark for oil, rose over 10% last month.
But cratering demand for consumer goods, as reported by big box retailers Target (NYSE: TGT) and Walmart (NYSE: WMT) could easily drag down both headline and core CPI for May. Core CPI, which is expected to rise 0.5% MoM, excludes energy and food costs while the headline reading includes both categories.
For that reason, slumping retail demand has the potential to cause a pair of “misses” for both the core and headline figures.
Target warned shareholders two days ago that it was on track to miss its Q2 profit projections and would soon mark down large portions of its inventory.
“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,” said Target CEO Brian Cornell in a CNBC interview.
Year-over-year, analysts expect headline CPI to remain level at +8.3%, matching April’s gain. But given how recent the Target bombshell was, analysts may not have been able to properly factor in the impact of a broader retail slump on CPI.
That’s why, despite galloping oil prices, bulls may be treated to a much-needed CPI “miss” tomorrow morning. Anything below +8.3% year-over-year would be enough to spark another major rally, as it would confirm that the inflation peak likely arrived back in March at +8.5%. Investors may take it as a sign that the Fed won’t need to hike rates much longer.
Should the May CPI data come in hotter than expected, however, stocks could easily retrace in response, as it would be interpreted as yet another reason for the Fed to shift hawkish ahead of its next FOMC meeting, which begins next Tuesday.