Wall Street’s main indexes dropped at the open on Thursday, with Big Tech leading declines, after hot U.S. inflation data put fears around a more aggressive tightening policy by the Federal Reserve back on the table. The U.S. 10-year Treasury yield touched 2% for the first time in 2-1/2 years.
The Dow Jones Industrial Average fell 137.25 points, or 0.38%, at the open to 35,630.81. The S&P 500 opened lower by 33.94 points, or 0.74%, at 4,553.24, while the Nasdaq Composite dropped 261.69 points, or 1.81%, to 14,228.68 at the opening bell.
Canada’s main stock index initially tracked the weakness in U.S. stocks at the open but soon cut those losses and is now trading in the green in morning trade, up about 0.4%. One stock helping to lift the index out of the red is Brookfield Asset Management, which revealed it may separate part of its asset management business, sending its shares surging 7%.
The Labor Department said that consumer prices jumped 7.5% last month compared with 12 months earlier, the steepest year-over-year increase since February 1982, and more than the 7.3% economists had forecast.
When measured from December to January, inflation was 0.6%, the same as the previous month. Prices had risen 0.7% from October to November and 0.9% from September to October.
Shortages of supplies and workers, heavy doses of federal aid, ultra-low interest rates and robust consumer spending combined to send inflation accelerating in the past year.
Traders are betting the Fed will begin raising rates at its March meeting, with money markets certain of at least a quarter point hike next month, and giving 1-in-4 odds of a half point increase.
Derek Holt, Head of Capital Markets Economics at Scotiabank, noted the “core” inflation rate came in at 6% - the highest since 1982.
“Forty-year highs in inflation accompanied by remarkably high breadth and no signs of pressures letting up at the margin should deeply worry the FOMC. It is so far behind the inflation fight with the US at or beyond maximum employment alongside rising wage pressures that this is going to be very difficult to address with monetary policy tools absent abrupt and harsh policy movements,” Mr. Holt said in a note following the inflation report.
“Persistent supply chain pressures combined with hot demand (ie: it’s both!) in a booming U.S. economy that is entering excess aggregate demand risk unmooring wage and inflation expectations. The odds of a 50 point hike in March and roll-off commencing as soon as Q2 have gone up again. The cost to the Fed’s misreading of inflationary pressures is that the Biden administration could well be a lame duck presidency over the duration of his term which could reduce policy flexibility down the road should the economic outlook require it,” he said.
Wall Street saw a turbulent start to the year as investors priced in aggressive tightening measures by the Fed and other major central banks amid soaring inflation, hammering high-growth technology stocks that have powered markets to record highs.
However, the group has seen a respite since the start of February with the tech-heavy Nasdaq gaining nearly 10% from its trough in January.
Among stocks seeing action this morning, Walt Disney Co jumped 5% after beating revenue and profit estimates, helped by Disney+ subscriber growth and strong attendance at U.S. theme parks, while Mattel Inc surged 11.6% after forecasting full-year profit above estimates.
In Canada, insurers Manulife Financial and Sun Life Financial narrowly beat quarterly earnings expectations after the bell on Wednesday, driven by strong growth in their asset management units, but Sun Life warned that the spread of the Omicron variant would impact first-quarter earnings.
The stocks took diverging directions as markets opened this morning, with Manulife up 3% but Sun Life down 3%.
Canada Goose Holdings Inc cut its full-year revenue and profit forecast, as Omicron-related restrictions dampen demand for the company’s luxury parkas and footwear. Its shares are down 18%.
Canadian business jet maker Bombardier Inc reported an adjusted quarterly profit, helped by higher aircraft margins and cost reduction efforts. Bombardier’s business jet revenue decreased 24% to $1.77 billion on fewer deliveries of aircraft. However, Bombardier expects revenues to rise more than $6.5 billion in 2022 as higher-priced corporate planes account for a larger part of deliveries. Bombardier shares opened up 1%.
Telus reported adjusted profit of 23 cents per share in its latest quarter, up from 22 cents per share during the same quarter last year. That missed analysts expectations for 25 cents profit. Telsus shares opened up 1.5%.
The earnings season continues to be supportive of markets overall, with 77.8% of the 316 companies in the S&P 500 that reported earnings through Wednesday topping analysts’ profit expectations, according to Refinitiv data.
Equities
Commodities
Oil prices rose after rallying on an unexpected drop in U.S. crude inventories in the previous session, as investors awaited the outcome of U.S.-Iran nuclear talks that could add crude supplies quickly to global markets.
Crude prices are up close to 1%.
Robust demand recovery from the coronavirus pandemic has kept global oil supplies snug, with inventories at key fuel hubs globally hovering at multi-year lows.
U.S. crude inventories fell 4.8 million barrels in the week to Feb. 4, dropping to 410.4 million barrels - their lowest for commercial inventories since October 2018, the Energy Information Administration said. Analysts in a Reuters poll had forecast a 369,000-barrel rise.
U.S. product supplied - the best proxy for demand - peaked at 21.9 million barrels per day (bpd) over the past four weeks due to strong economic activity nationwide, EIA data showed.
Meanwhile, aluminum prices raced to their highest in more than 13 years on Thursday, driven by persistent worries about smelter closures and shrugging off a large inflow of inventories.
Copper and other base metals were also buoyant ahead of U.S. data as investors scooped them up as a hedge against inflation.
Currencies and bonds
The Canadian dollar turned lower on the hotter-than-expected U.S. inflation numbers, which sent the greenback soaring.
Traders are keeping a close eye on the trucker protests that are snarling traffic into and out of the U.S. There have been reports circulating that Ford, General Motors and Toyota have idled some domestic production as supply chains have been compromised by the protest blocking the Windsor/Detroit bridge.
The 10-year U.S. note yields hit 2.001%, before dipping back to last trade at 1.986%. Bond yields have been climbing as investors anticipate the Federal Reserve will begin to tighten monetary policy to combat inflation, starting with an interest rate hike in March, as well as expectations the U.S. central bank will begin to wind down its balance sheet.
“The market is starting to price in a much more aggressive path of rate hikes ... clearly there is a sense of urgency again,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
Yields, which move inversely to prices, are up from 1.79% at the beginning of February. The last time they breached 2% was August 2019.
“I would say the chances of yields continuing to go higher are pretty high,” said Gargi Chaudhuri, Head of iShares Investment Strategy, Americas, at BlackRock, speaking ahead of the data.
Other corporate news
Twitter Inc reported weaker-than-expected quarterly advertising revenue and user growth on Thursday and forecast revenue short of Wall Street targets, indicating that a turnaround plan has yet to bear fruit for the social networking site. Still, Twitter said it made “meaningful progress” toward its goal of reaching 315 million users and $7.5 billion in annual revenue by the end of 2023, and said user growth should accelerate in the United States and internationally this year. Shares are up 2%.
PepsiCo Inc gained 1.1% after beating revenue estimates, announcing a 7% increase in annualized dividend and a new $10 billion stock buyback program.
Uber Technologies Inc climbed 5.5% after reporting its second quarterly operating profit as demand for ride-hailing services approached pre-pandemic levels and its food delivery business turned profitable.
Precision Drilling Corp. says it lost $27.3 million in the fourth quarter of 2021 compared with a loss of $37.5 million a year earlier as its revenue rose 46 per cent. Shares are up 2.8%.
Kellogg Co beat Wall Street estimates for quarterly sales on Thursday as higher product prices offset pressure from reduced demand for its snacks and cereals. Shares are up 2.5%.
Veritas Research downgraded Laurentian Bank of Canada to “sell
National Bank of Canada cut Sun Life Financial to “sector perform” from “outperform”
Other earnings today include: ARC Resources Ltd.; Aurora Cannabis Inc.; Coca-Cola Co.; Colliers International Group Inc.; Constellation Software Inc.; Domtar Corp.; IGM Financial Inc.; MEG Energy Corp.; Russel Metals Inc.; Saputo Inc.; Trisura Group Ltd.
Also see:
Thursday’s analyst upgrades and downgrades
Thursday’s small-cap stocks to watch
Economic news
The U.S. consumer price index gained 0.6% last month after increasing 0.6% in December, the Labor Department said on Thursday. In the 12 months through January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982. That followed a 7.0% advance in December and marked the fourth straight month of annual increases in excess of 6%. Economists polled by Reuters had forecast the CPI rising 0.5% and accelerating 7.3% on a year-on-year basis.
U.S. initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 223,000 for the week ended Feb. 5. Economists had forecast 230,000 applications for the latest week.
With files from Reuters
Darcy Keith