Stock futures head lower after more hot inflation data

U.S. stock index futures fell during morning trading Tuesday as new inflation data continued to show a sharp rise in prices.

Futures contracts tied to the S&P 500 futures declined 0.6% while and Nasdaq 100 futures were off by 1%. Futures for the Dow Jones Industrial Average slipped by 97 points.

Futures moved lower after the November reading for the producer price index showed a year-over-year increase of 9.6%, the fastest pace on record and above the 9.2% expected by economists, according to Dow Jones. The index rose 0.8% month over month, above the 0.5% expected.

Tesla shares were among the biggest early droppers on the S&P 500, falling 2.1% premarket after CEO Elon Musk announced that that he has sold another $906.5 million in shares.

Fellow automaker Ford also fell, down 1.7% following news that by 2030 Toyota would be investing $35 billion into battery-powered electronic vehicles, a space where Ford has sought to establish itself as a leader.

Pfizer shares rose nearly 1% after final results of tests on its Covid drug showed it reduced hospitalizations and deaths by 89% in high-risk patients.

The hotter-than-expected inflation reading comes as the Federal Reserve also kicks off its two-day meeting on Tuesday. The central bank will release a statement on Wednesday with quarterly projections for the economy, inflation and interest rates. Chairman Jerome Powell will also hold a press conference.

Investors will be watching closely for commentary around if the Fed plans to accelerate the end of its bond-buying program. At present, the central bank’s asset purchase program will end in June 2022, but several officials have spoken about ending the purchases sooner.

The latest CNBC Fed Survey showed that investment professionals and economists expect the Fed to wind down its asset purchases by March and begin rate hikes in June.

Wolfe Research strategist Chris Senyek said in a note to clients on Tuesday that the Fed will need to walk a fine line to avoid spooking the markets.

“Fed Chair Powell has a very difficult communication job ahead of him tomorrow afternoon. We’re in line with consensus and expect the Fed to end its tapering program in March/April and start hiking in May,” the note said. “If Fed Chair Powell emphasizes that the FOMC remains flexible, the ‘Fed put’ should remain in place. However, if his tone is overly hawkish, it could turn into a disaster like December 2018.”

Morgan Stanley CEO James Gorman told CNBC on Monday that he thinks the central bank should start raising rates soon.

“The Federal Reserve would be better off storing away some of rate increases, so when the inevitable turn down comes, you’ve got some ammunition to fight with,” he said. “At the moment, at zero interest rates, we have no ammunition.”

During trading Monday, the Dow slid 0.89%, or 320 points, while the S&P 500 dipped 0.9%. The Nasdaq Composite fell 1.39% as investors rotated out of technology stocks with high valuations.

Shares of airlines and cruise line operators declined amid fears that the omicron variant could slow travel.

While equities fell broadly on Monday, growth areas of the market underperformed. The iShares Russell 1000 Growth ETF dipped 1.22%, while the iShares Russell 1,000 Value ETF declined 0.45%.

Despite Monday’s decline for equities, the S&P 500 is roughly 1.6% below its Nov. 22 all-time intraday high. The Dow is 2.5% below its record, while the Nasdaq Composite is about 5% under its high-water mark. The Russell 2000 index is down a sharper 11.3% since its Nov. 8 high.

Looking forward, some strategists, including LPL Financial’s Ryan Detrick, believe there’s upside ahead for equities.

“We believe pent-up demand, gradual improvement in supply chain challenges, solid labor force growth, and productivity gains will all contribute to another year of above-trend economic growth in 2022,” he wrote in a note to clients. “COVID-19-related risks remain and the potential for a policy mistake may be elevated as the economy moves towards normalization, but we think the overall environment will be supportive of business growth and ultimately equity markets,” he added.

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