Stock futures fall as inflation concerns persist, oil prices jump

On Oct 11, 2021

Stock futures fell Monday morning as investors mulled ongoing signs of inflation and supply-related challenges and awaited more data on corporate earnings.

Contracts on the S&P 500, Dow and Nasdaq dropped ahead of the opening bell. Treasury yields rose especially across the long end of the curve, and the benchmark 10-year yield hovered around 1.61%, or its highest level since June.

U.S. West Texas intermediate crude oil futures extended gains after logging a seventh straight weekly advance, jumping by another 3% Monday morning to top $82 per barrel and add to concerns over rising energy, commodity and input prices. WTI crude futures hovered at their highest level since 2014, while Brent crude was at its highest since 2018 after topping $84 per barrel.

Stocks have traded choppily over the past several weeks as investors contemplated the equity market implications of ongoing price increases against a backdrop of decelerating economic growth. Elevated demand and supply-side shortages have pushed up the prices of commodities from oil and natural gas to cotton, and labor shortages have raised the specter of lasting increases in wages and higher costs to employers. Last week’s September jobs report “had an inflationary feel with strong wage growth, a rise in the workweek, and a drop in [labor force] participation,” Neil Dutta, head of U.S. economics at Renaissance Macro Research, wrote in an email last week.

This week, investors will receive the Bureau of Labor Statistics’ latest Consumer Price Index and Producer Price Index, each for September. Increases in core consumer prices, excluding food and energy, are expected to remain elevated on a historical basis, coming in just slightly below June’s 30-year high in price increases. Producer prices, meanwhile, are expected to have accelerated further last month.

“‘Stagflation’ was the most common word in client conversations this week as equity market volatility remained elevated,” David Kostin, Goldman Sachs chief U.S. equity strategist, wrote in a note Monday morning. “Stagflation is not our economists’ base case expectation, but the weak historical performance of equities in stagflationary environments helps explain why investors are concerned.”

Over the last 60 years, the S&P 500 has returned 2.5% on median per quarter, but has fallen by 2.1% during periods of stagflation, or times with high inflation and weak GDP growth, Kostin added.

“Despite near-term uncertainty, we expect the equity market will continue to rally as investors gain confidence that the current pace of inflation is ‘transitory,'” Kostin said.

For investors, the pick-up in third-quarter earnings season this week will help offer further company commentary around the impacts of rising prices across the recovering economy. The big banks are on deck to report this week, with names including JPMorgan Chase (JPM), Bank of America (BAC), Morgan Stanley (MS) and Goldman Sachs (GS) each due to post quarterly…