Nasdaq, S&P 500, Dow slump as inflation worries outweigh banks earnings

Wall Street in New York City

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The bears were back in control with U.S. stocks deep in the red in Friday afternoon trade. The three major indices were unable to extend a spectacular rally staged the previous day, which saw the S&P and Nasdaq snap six-day losing streaks.

Investor sentiment was muted as a strong start to the third quarter earnings season by major U.S. banks was overshadowed by the latest sentiment survey which showed a surprise jump in one-year inflation expectations.

The tech-heavy Nasdaq Composite (COMP.IND) was down 2.46% at 10,387.15 points while the S&P 500 (SP500) was 1.93% lower at 3,599.23 points. The Dow was -1.12% at 29,702.99 points, getting some help from UnitedHealth and JPMorgan after their results.

On Thursday, all three indices mounted a remarkable comeback after an initial retail inflation-data inspired drop to end more than 2% higher. The events, which Deutsche Bank research called a “rollercoaster”, sparked speculation of whether a bottom had been reached or whether they were just a blip.

The University of Michigan’s preliminary reading of October consumer sentiment improved slightly to 59.8. However, in its first rise since March, one-year inflation expectations increased to 5.1% from 4.7% previously and consensus of 4.6%.

“The uptick in inflation expectations probably is a response to the increase in gas prices in recent weeks, in which case it won’t continue,” Pantheon Macro’s Ian Shepherdson said. “Moreover, this is a preliminary reading and could be revised by as much as +/-0.2pp, if recent experience is any guide.”

Shepherdson added: “Still, on the heels of the September inflation data this rebound – reversing the drop last month – does not look good, given how closely policymakers appear to track the measure.”

Third quarter earnings season was kicked off on Friday with major U.S. banks leading the way. Industry bellwether JPMorgan and Wells Fargo rose after both topped analysts’ expectations, while Morgan Stanley issued a mixed report, sending its shares lower. Insurance giant UnitedHealth also rose after it boosted its annual outlook.

The season kicks off in earnest next week, with expected quarterly reports from mega-names Tesla, Netflix and Johnson & Johnson leading the way.

Turning to the bond market, rates were slightly higher. The 10-year Treasury yield (US10Y) was up 3 basis points to 3.98% and the 2-year yield (US2Y) was up 4 basis points to 4.49%. The yield curve inversion continues to widen, earlier hitting another two-decade record.

“Eventually a break above 4% for the 10Y now looks inevitable as the Fed is unlikely to signal any inclination to slow its pace near term,” ING said.

The U.K. is having an outsize impact again. Gilt yields reversed after Prime Minister Liz Truss named her new Chancellor.

In other economic data, September retail sales were flat, falling short of an anticipated 0.2% gain. Core sales ex-autos rose 0.3% vs. a 0.4% forecast. Import prices fell a higher-than-expected 1.2%.

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