(Bloomberg) — Stocks dropped after paltry economic figures and a weaker outlook from the world’s largest retailer underscored the impacts of inflation pressures on consumer spending, with recession fears running rampant as the Federal Reserve gets ready to deliver another big rate hike.
Walmart Inc.’s selloff dragged down industry peers, with Morgan Stanley saying its forecast is a “potential warning signal” for Amazon.com Inc.’s merchandise margins. Economic barometer United Parcel Service Inc. slumped on disappointing package deliveries. The Nasdaq 100 slid 2% ahead of earnings from Microsoft Corp. and Google’s parent Alphabet Inc. Defensive groups like health care and utilities climbed. The dollar rose.
“From the corporate perspective today, what’s driving the red is disappointing guidance from Walmart, which brings into question the resiliency of earnings,” said Angelo Kourkafas, investment strategist at Edward Jones. “We’ve been talking to our clients about earnings estimates and how, even though we don’t expect a deep recession, we think that earnings estimates are elevated given the challenging macroeconomic backdrop.”
Traders also braced for another 75-basis-point hike by Fed officials on Wednesday, with a combined increase of 150 basis points over June and July representing the steepest rise in rates since the early 1980s when then chairman Paul Volcker was battling sky-high inflation. Dimming views on the economy sank US consumer confidence to the lowest level since February 2021, while a gauge of new home sales fell for the fifth time this year.
Read: IMF Cuts World GDP Outlook a Third Time as Inflation, Rates Jump
US officials are likely to stay hawkish for longer amid persistently high inflation, according to Goldman Sachs Group Inc. strategists, the latest to enter the debate around a potential central bank pivot as growth slows. Their opinion aligns with Morgan Stanley’s Michael Wilson, who also noted Monday it’s too early to expect the Fed to stop hiking. Meantime, JPMorgan Chase & Co. strategists said bets that prices have peaked will lead to a Fed pivot and improve the picture for equities in the second half.
“A soft landing feels like a long shot from here,” wrote Seema Shah, chief global strategist at Principal Global Investors. “In the last 11 tightening cycles, the Fed has only skirted recession three times (1965, 1984 and 1994). In each of those cycles, inflation was lower and the Fed funds rate was meaningfully higher at the point of liftoff, so Fed tightening didn’t need to be as dramatic as it does today.”
Other corporate highlights:
- General Motors Co. reported weaker profit than analysts’ estimates as semiconductor shortages kept production volumes in check. The automaker also warned it is bracing for tougher times ahead for the economy.
- 3M Co. plans to spin off its multibillion-dollar health-care operations, a move that could leave the manufacturer flush with cash as it copes with shifting economic currents that have sapped its profits.
- McDonald’s Corp. reported sales that topped estimates as consumers continue eating out despite higher prices.
- Coca-Cola Co.’s sales exceeded expectations and the company raised its full-year guidance.
- General Electric Co. beat Wall Street’s expectations for profit and reported surprise positive cash flow as sales at the key jet-engine division soared.
- Archer-Daniels-Midland Co. posted its highest profit ever for a second quarter as soybean processing boosted earnings.
- Coinbase Global Inc. is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter.
The annual summer lull combined with steadily deteriorating economic conditions and recession fears are also keeping junk-bond borrowers on the sidelines, with the month-to-date supply at $1.06 billion, the slowest July at least since 2006.
Here are some key events to watch this week:
- Alphabet, Apple, Amazon, Microsoft, Meta earnings due this week
- Fed policy decision, briefing, Wednesday
- Australia CPI, Wednesday
- US GDP, Thursday
- Euro-area CPI, Friday
- US PCE deflator, personal income, University of Michigan consumer sentiment, Friday
Musk, Tesla and Twitter are this week’s theme of the MLIV Pulse survey. Also share your views on the S&P 500’s biggest stocks. Click here to get involved anonymously.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1.3% as of 2:33 p.m. New York time
- The Nasdaq 100 fell 2.1%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World index fell 1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro fell 1% to $1.0121
- The British pound fell 0.1% to $1.2029
- The Japanese yen was little changed at 136.68 per dollar
Bonds
- The yield on 10-year Treasuries declined one basis point to 2.79%
- Germany’s 10-year yield declined nine basis points to 0.92%
- Britain’s 10-year yield declined two basis points to 1.92%
Commodities
- West Texas Intermediate crude fell 1.7% to $95.01 a barrel
- Gold futures fell 0.2% to $1,733.40 an ounce
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