Closing Bell - Closing Bell: Inflation Sparks a Sell-Off, Gaming Out the Fed 06/10/22

Episode Date: June 10, 2022

Another red-hot inflation print sent the major averages sharply lower in Friday trading. Market experts Barry Knapp, Tony Crescenzi and Rebecca Patterson break down what they’re watching in the selloff, and expectations for the market going forward. Former Fed vice chair Roger Ferguson discusses the implications for next week’s Fed decision. And Barclays economist Jonathan Millar lays out why he now expects an above-consensus rate hike from the central bank.

Thank you, Tyler and Kelly. Stocks falling hard as inflation hits a four-decade high. The most important hour of trading starts now. Welcome, everyone, to Closing Bell. I'm Sarah Eisen. Take a look at where we stand in the market. We are down more than 600 points on the Dow. At the lows of the session, we were down 853.

So we're off that point, but it is still a sea of red on Wall Street. What's working right now? Some of the consumer staple names in the Dow, that's Walmart, P&G, Verizon and Coca-Cola all higher, everybody else lower. Goldman Sachs and Microsoft weighing the most on the Dow. There's the S&P 500 down 2 percent, the Nasdaq getting hit even harder on those rising rates. We're seeing it in the Treasury market down almost 3 percent right now. We're looking at another week of declines. Longest losing streak for the Dow since back in the 1930s. Take a look at the sectors weighing most right now on the S&P 500.

You've got everything down except for staples. That's the highest performing sector. Consumer discretionary is the worst and pretty much all the components there, from travel names even, which have held up relatively well, to Amazon.com and Tesla all weaker today. Technology, financials, materials, and industrials are bringing up the rear. If you think it's ugly here, look at the action in Europe. They're also dealing with higher inflation and coming rising interest rates.

That has spiked yields in places like Italy and Spain. We saw the destruction in the market after today's U.S. CPI report. The Italian stock market down more than 5 percent. And in Germany, 3 today's U.S. CPI report, the Italian stock market down more than 5% and in Germany, 3% declines. We're going to be all over the sellout for you throughout the show with some great guests to help you navigate it, including former Federal Reserve Chairman Roger Ferguson, Barry Knapp from Ironsides Macroeconomics, Tony Crescenzi from PIMCO on bonds, and Bridgewater's Rebecca Patterson on the strategy. Also, Eric Friedman joins us from U.S. Bank Wealth Management.

First up, let's look under the surface of that CPI inflation report. The headline print rising 8.6% in May, sharpest increase since 1981. And some line items have truly seen staggering jumps in the last year across wide swaths of the economy. Energy, for example, we all know that and feel that up nearly 35% overall. Fuel oil prices more than doubling. Electricity prices up 12%. Used vehicles up more than 16%. New vehicles rising more than 12%. It's food, too. As we know, prices were up 10% and nearly 12% for that supermarket. Food at home,ats, poultry, fish and eggs up 14%.

And then there's shelter, which is rent and makes up a huge part of the overall number, rising 5.5% and seen in acceleration. A lot of it has to do with where the demand is in this economy. Just look at airline fares, jumping nearly 40% since this time last year. And those dashed hopes of decelerating prices are having a big impact on market sentiment today. Mike Santoli taking a closer look at the sell-off in stocks and bonds for his dashboard today. So much for peak inflation. Yes, Sarah. You know, S&P down about three and a half percent in the last 25 hours or so. So yesterday, the market started to lean in the direction of maybe it was going to be an unfriendly CPI report. Just not enough. So what

we have here is a bit of a kind of low intensity retest of the recent lows we got to three weeks ago. That was around 3,900 exactly at a closing level. Intraday, it was more like 3810. So that leaves you a couple percent on the downside before you get to those intraday lows. Now, even that bounce, for as strong as it was, 9%, you had three days of really strong buying right in here. It never got up into the levels. And we've repeated this a bunch of times that would have said, fine, it might be more than a reflex relief rally within a downtrend. Also, the other thing to keep in mind for as relentless as it has been, it's kind of a controlled demolition. It's not been panicky with massive bursts of selling. It's been what kind of the Fed wants, tightening of financial conditions, revaluing stocks, repricing for a tighter outlook and maybe

some more growth risk. Now, take a look at the Treasury yield curve. This is the two-year versus the 10-year. Two-year yield has gotten above 3%. It's gone up well more today than the 10-year has, even though the 10-year is challenging its highs. So this is the spread between 10 and 2. Now, we did get here slightly negative or just about flat early this year. We're not quite flat right here. You see it's about 10 basis points. What it's basically telling you is Fed's going to have to go faster than we thought, and therefore two-year yields have upside. But it's going to either work to restrain inflation and or growth is going to come down enough, and maybe there's a recession risk in there,

that you're basically going to not have the long term yields and long term inflation risk in there. That's the story of bonds. So I mentioned the streak that we're on. So now the Dow is going to close down for the 10th week in the last 11. We have not seen a stretch like that. Hard to believe since the Great Depression. Last time we went down that much was 1932. So I do wonder just it's been relentless selling.

How much of it is already priced in? The recession, if that's where we're going, the higher interest rates, if that seems to be the conclusion, even though we get these surprises on inflation. I would say, I don't think an all-out recession is likely priced in because you're still not seeing kind of the earnings effect necessarily being registered in stocks. We are down to about 16.5 times forward earnings. That's if earnings hold up. That's, I would say, fair value probably, generally speaking, over the last 20, 30 years. But do these sell-offs stop when it gets to fair value,

or do you overshoot to get cheap, at least for a brief period of time? That's a big question to me. Mike, thank you. We'll see you a lot throughout the hours as we follow this sell-off on Wall Street, down now 700 on the Dow. Let's bring in Barry Knapp from Ironside's Macroeconomics and PIMCO's Tony Crescenzi on how to deal with all of this volatility. Tony, I think the big surprise here on inflation was that you did not see a moderation in the good side of things. We knew that everything was going to services right with airlines.

But but Target starting to mark down apparel and TVs. We know. We just got that warning. Why are we not seeing that in the data at this point? Well, they say about monetary policy, there are long and variable legs. And you could say monetary policy is like walking a dog with a long leash, pretty difficult to control, pretty difficult to say where it's going. And when leaving one regime and the regime we're in, which we all dislike, is this high inflation regime. When leaving it, there tend to be remnants of the old regime. So we should probably continue to see news like this for a little while longer. But by the fall and almost certainly by the winter,

no one wants to call a peak. And the idea of catching falling nises should be loathed. The news should be a lot better, and investors at that time will probably be looking ahead to the idea of peak inflation if it hasn't already occurred, and the mood will be a lot better, more than likely. Well, investors have been saying, I think, Barry, you have been saying that we have seen peak inflation. A lot of people like you have been saying, I think, Barry, you have been saying that we have seen peak inflation.

A lot of people like you have been totally wrong. I wouldn't admit to being totally wrong. Goods inflation, core goods inflation was 12.4 in February. It's 8.5 now. Last night we got Chinese manufacturing, PPI. That's fallen from over 10 percent down to six. You've had CPI even on a quarter on quarter basis fall from three percent or eight percent in March down to five, too. So the momentum is is decidedly headed down. But Tony hit a great point, which is monetary policy does work with long and variable lags.

And the two sectors outside of energy that most strongly contributed to the beats on the headline and the marginal beat on the core this month were the two most interest rate sensitive parts of the economy, namely autos and housing. So, yes, we've got a 220 plus now basis point shock to mortgage rates. My work on housing prices using things like a correlation matrix indicate that they're peaking right now and are likely to come off very strongly by the fall again, as Tony indicated. And I think that that broad story is intact. What isn't intact, though, is the political fallout of this and the policy implications of it are still really acute. And that brings up the question of what does the Fed do next week? I'd love to see them accelerate the caps on winding down the balance sheet, even start considering outright sales of mortgages. That would push those longer term rates up and potentially accelerate that cooling of demand in autos and housing where demand is in excess of supply. But more likely if they do anything and they're probably won't.

But if they do anything, it'd be a 75 instead of a 50. How likely do you think that is, Tony, that we'll do a 75 basis point hike? Fed Chair Powell ruled it out last time, but this is a pretty big surprise in terms of inflation. No groundwork has been laid by the Fed for that possibility. It would come- Well, they're in quiet period now. Yeah, but in looking at the markets and forward pricing, Fed Funds futures, Eurodollar futures, et cetera, it seems like the markets only have a fraction of that 75 basis points priced in, meaning the extra quarter. The landscape would be different, of course,

for the July meeting. So if Fed Chair Powell thinks he wants to lay the groundwork for the possibility of it, he could then. But then you could argue, Sarah, that why wait? If you're going to hint at it, why not just do it? And there is a benefit to acting tough. I would often call it tough love. The more vigilant the Fed is toward inflation, the better the outlook. And the fact that the Fed's front-loading its interest rate hikes now compared to some other cycles, for example, 1994, when the 10-year yield got to over 8 percent, that front-loading should limit how much it has to do later. So, Barry, what's the bottom line for the equity market?

What would you tell investors to do, given the fact that you are still seeing signs of a peak in inflation and do see it starting to come down as monetary policy really hits hard? Yeah, so a couple of weeks ago, I was thinking about Paul Samuelson's famous quip about the stock market predicting nine of the last five recessions and realized in my adult life, there's been five recessions and four 20 plus percent declines that were false alarms. This, I think, is the fifth. Even if we were to have a mild recession, the median decline associated with that in the stock market is 24%. So we're at a really good entry point unless we're about to have a very deep credit cycle recession that causes earnings to collapse as they did in

2008. And I put a very low probability on that. So to me, this is a good entry point. I think the second half of the year, the market will make up the losses of the first half of the year. So as always, my expectation is the liquidity got withdrawn, that markets were going to struggle. And so I think this is a good entry point for investors with a reasonable time horizon. And I would buy the cyclical parts of the stock market. Those are the ones that are really inexpensively priced. The banking sector, for example, the asset mix here evident so far this year from cash and government securities to real loans is going to boost return on assets, boost return on equity. And profitability is going to respond accordingly. So I think this is a good spot to put money to work.

Wow. In the cyclicals, financials down 3 percent, materials down 2.5 percent. Today I'm talking about industrials down 2.2 as recession odds do increase in the market. Tony and Barry, we'll leave it there. Thank you both for joining me on an important day. Thank you. After the break, former Federal Reserve Vice Chair Roger Ferguson breaks down how that hot CPI report could impact the Federal Reserve's rate decision next week. You're watching Closing Bell on CNBC. The Dow is down 670.

The S&P is down 2.3 percent. And the only sector that's positive, consumer staples. We'll be right back. Check out today's stealth mover. It's contour brands. Goldman Sachs downgrading the maker of Wrangler and Lee jeans from buy and cutting its price target on the stock to $41 from $55, citing economic headwinds and a risk to margins from higher commodity costs and supply chains. Joining the consumer stocks in the red, though underperforming, down almost 7 percent. Consumer discretionary down three and a half. Speaking of higher costs, the May inflation report seeing costs rising across the board from food, gas, rent, transportation.

And former Federal Reserve Vice Chair Roger Ferguson joins us now to discuss. Roger, it's great to have you, especially on a day like today. Welcome. Thank you. I think that my key question is, how is the Fed likely to view this report? Are they likely to look at it and say, we're going to stay on our current path, or we need to do more? I think what they're likely to do is see this, as you indicated in the opening, as being inflation across the board, higher than expected. Some might see signs of peaking, but I think it's too early to call that. My expectation is that they will do 50 next week as signaled. But I think the tone around that is going to be leaning towards a bit more hawkish. I suspect when we get to the press conference,

the possibility of 75 being on the table in the future will be talked about. And so I think next week it's the 50 that's been broadcast. After that, I think the risk, so to speak, is to maybe an extra 50 or two more than the market's priced in and possibly a 75 if called for. And I think that will be the signalling the next time they have a chance to speak to us. Well, in terms of expectations, one thing this report did was it sort of knocked out the idea that they would pause in September, as was indicated by Rafael Bostic, the Atlanta Fed president.

So now there's 50-50-50 priced in June, July, September. Roger, is there merit to a pause? Because is there a risk here that we could get into a stagflationary environment where growth does slow pretty substantially and we still have these higher inflation numbers? Well, there's absolutely that risk, which is, I think, why the pause is not likely at this stage. It would have been one thing to consider a pause if we had seen some sign of inflation peaking and coming down. And, you know, maybe the committee would have said, well, let's wait and see if we've got clear and convincing evidence to quote Chairman Powell. But at this stage,

I think the idea is going to be we will have to, they will continue to have to raise rates, maybe aggressively, 50-50-50, maybe a 75, until we really get inflation under control. And that means, frankly, risking the possibility of, as Chairman Powell said, some pain. And so I think the tradeoff has really got to be making sure that inflation is under control. That is job number one, number two, and number three. And if what that means is slowing and potentially dipping into a short, shallow recession, I think the Fed's willing to do that because this inflation is really unacceptable and far out of the 2% range, obviously. Well, and now there are questions about credibility, Roger.

Today, the longer-term inflation expectations are starting to break out, raising the question of whether inflation expectations are becoming unanchored. Can you just explain why that's such a big deal to these central bankers and their credibility? Oh, well, the whole issue of inflation expectations is incredibly important because what happens is then it becomes easier to build in one of these spirals. You hear people talking about a wage price spiral. Wages go up, prices go up. There's also something that one might think of as a wage wage spiral. People leave one job to get more wages someplace else, and then their former employers is forced to raise wages.

And so I think this question of inflation expectations is central to their thinking. We know that inflation is too high. We see it starting to broaden across many categories, as you talk about. We see it picking up and remaining high in the core inflation, taking out food and energy. And the last thing they want is to start to see inflation expectations become unanchored because then households, businesses expect there just to be an increase in prices consistently, and that becomes something that's very, very difficult to deal with. So that's why I went back to 350s, maybe a 75.

And to your point, they want to avoid stagflation, but they absolutely want to avoid inflation picking up. And if that means a short, shallow recession, then that may be the kind of pain that we may be in for. Well, why do you say short, shallow? How do we know? We've got a peak today in the Michigan consumer confidence numbers. It was pretty ugly. Clearly, this inflationary shock is having an impact on consumers, and now we're going to have a rate shock on top of that.

Well, you're right to call me on the question, short, shallow. That may be a bit more of a hope than a prediction. One can hope that that may be the outcome. And so, you know, we'll wait and see what happens in that regard. But, you know, as you wait and see what happens in that regard. But, you know, as you point out, it's very hard, and I've pointed out in the past, very hard to achieve a soft landing. Now it looks as though inflation is continuing to mount. And so I think they are going to have to tap the brakes harder than they had expected. And obviously, you know, the risks around that are pretty clear to everybody. And that is playing into the point that you made.

Consumers may be starting to feel noticeably less optimistic. I did a survey of CEOs a little while ago, and 60 percent of them expected there to be some sort of recession, hopefully soft, short and shallow. And so, you know, that's a real possibility out there. And the fact that it may be a little harder at this stage, I think, is anyone's guess. Obviously, there are political ramifications of this as well, not just for the Federal Reserve and not just for investors, but but for President Biden, who has said he's making it his number one priority. Why wouldn't the Biden administration why do you think they wouldn't want to take off the China tariffs? Do you think that would have a material impact on inflation? We're going to talk about that later on a retail segment.

But Howard Schultz brought it up yesterday at Dealbook, CEO of Starbucks. What economic impact would that have? I think it is only marginal. I think in many ways it's a bit more symbolic than real. I think you heard today from Brian Deese at the White House that the main thing that the White House wants to do right now is give the Fed room to take its necessary actions. At this stage, it's really primarily monetary policy.

Anything that the administration can do might be marginally helpful, certainly with signal and interest, but I wouldn't argue that that's sort of the main thrust right now in terms of getting inflation under control. That is primarily at this stage in the hands of the Federal Open Market Committee and the Federal Reserve more broadly. Well, and President Putin, unfortunately, given what's going on with energy and food prices. Roger, thank you. Roger Ferguson. Thank you.

Let's give you a check on the markets right now. Down a little less than 700 points here on the Dow. Again, we were down more than 850 at the lows, but still, pretty ugly day where every sector is red except for consumer staples. This is in reaction to that inflation report. It was really a one-two punch with the weaker consumer confidence as well. S&P down 2.3%. Look at the Nasdaq. It's down about 3 percent. Microsoft, Apple, Amazon, NVIDIA, Meta, Adobe, all lower. Really, the only thing doing well are the Chinese internet names, JD.com and Pinduoduo having another good day, and some of the staples like Pepsi and Kraft

Heinz inside the Nasdaq. We're going to talk more about the inflation impact on the Fed in just a bit when we are joined by the Barclays economist who now says he expects a 75 basis point hike next week. That would be a surprise. And as we head to break, check out some of today's top search tickers on CNBC.com. Tenure Treasury taking the top spot. No surprise, yields are higher today. We're at 315, as high as 317. I think 320 is the high of the year, but we are high of the year, but we're near there. The S&P, broad markets, clearly. And then the disaster that is the DocuSign after earnings down 25 percent. And the Nasdaq down three. We'll be right back.

Give you a check on retail, which is mostly lower than Walmart is bucking the trend. It's higher, along with some of the consumer staples. Broad sell-off on Wall Street as today's inflation report shows prices are surging for consumers across the board from food to apparel. Joining us now, National Retail Federation President and CEO Matt Shea. It's good to see you. Inflation in apparel, I just checked that was high, more than 5%. I think a little bit of deflation maybe in men's pants for some reason. But do you expect this number to come down given what we've heard from some of the retailers reporting

earnings this period? Well, Sarah, I think a couple of things are going on. Of course, input costs are going up. Transportation logistics costs are going up. We've seen some retailers talking about how quickly consumers are pivoting into new behaviors. And so I think there's still a lot of churn and change going on out there in terms of consumer buying habits that might take a quarter or two to settle out. But overall, I think many of them still see a healthy consumer. And it's just a question of getting the goods right. The inventory issue is actually better than a lot of people think. If we go back to 2019, the inventory to sales ratio was about $1.50 in inventory for every dollar of sales. As we sit here today, in the face of this

unprecedented demand, we've got about $1.15 in inventory for every dollar of sales. So while we do have more inventory, we've got much greater sales, and that accounts for what we're seeing in the supply chain, we're seeing at ports, we're seeing across the economy. The question, Matt, is what happens to sales and that healthy consumer that you describe when you have food at home up almost 12 percent from last year and energy prices, we know, up more than 35 percent from last year. That is a double tax on the consumer. It absolutely is, Sarah. And that's that's one of the reasons we have been for months talking with the administration and congressional elected leaders, encouraging them to be as good as their word. And that is if we're going to take an across the board approach to trying to reduce inflation, we should really mean it and we should do everything we can. And one of the easy things we can do that doesn't require

congressional action, doesn't require sort of a longer tail of Fed action, the administration could eliminate the tariffs on all imported goods from China. That's $300 billion worth of goods. Number of estimates indicate that's up to $1,200 a year per family. And while, you know, Roger said to you a minute ago, it might not show up tomorrow. It is actually not that meaningful. Well, he said it won't show up tomorrow, but it's a good signal for the market. And I think it demonstrates to the market, to his point, that the administration really means it when they say they're going to do everything. And so, you know, this is partly a political problem. But it also demonstrates, sorry to cut you off, Matt, but also demonstrates that we are willing to,

you know, be friendly toward China in a not so friendly trading environment. Well, I think there are ways you can manage the China relationship that don't require you to inflict pain on American consumers. And this is a tax on consumers, plain and simple. It always was. It continues to be. And if there's not really meaningful results from the tariffs, which are punitive and punitive on American consumers, then we ought to try other strategies. We ought to be back to let's do this in a multilateral way. Let's work with nations across the country. Let's have a really meaningful replacement for the Trans-Pacific Partnership, whatever that might be. So I think there are a lot of things happening out there. And if we're really committed to fighting inflation,

we think that this ought to be at the top of the list in terms of eliminating the tariffs. And then do the Ocean Shipping Reform Act, which we support. The president spoke about earlier. That is very important. We support that. Keep working with supply chain stakeholders. All those things matter. And we ought to be trying to pursue all of them simultaneously. Well, the White House hasn't

really ruled it out. I'm trying to read some of the communications that we've got. It sounds like they're thinking about it and they're talking about it. But but no word yet if that's the direction we're going on the China tariffs. Is that what you you hear as well? Yeah, I don't think that they've they've confirmed one way or the other. It's clear that there's a lot of discussion inside the administration among many of the senior leadership, different agencies and departments. We've actually got our board and other retail leaders coming to Washington next week. We're going to meet with Secretary Yellen. We're going to meet with our friend Jason Furman, among others, some congressional leaders. We're going to be talking China policy with some members of the administration. So they haven't given us a guarantee. They haven't given anyone a guarantee

of anything one way or the other. But they certainly be they're signaling, I think, that they're giving it consideration. And we ought to consider that a positive sign and be optimistic. Matt, so a lot of this has to do with the supply chain. And one thing I think that we should point out in today's report is it did include potentially the impact of China being locked down and some of those ports being disrupted and some of the factories having to be shut down. What are you getting on the supply chain? China's reopening. COVID is still with us, but it feels like the world is dealing with it a little bit better. We've got vaccines. We've got treatment. So is that crunch easing in any material way that would

impact some of these prices that we're seeing at retailers? Yes, Sarah, I think there's reason to think positively about the future in that regard. Certainly, retailers learned dramatically over the course of the past two years and the massive disruptions they experienced to their supply chain with their sourcing partners, how to work more efficiently, to move more quickly, to anticipate and plan more effectively. We saw that. So I think all of that experience goes into thinking about the future. We'll see that. We also know American consumers are resilient. They shop around. There's an enormous amount of transparency about the future. We'll see that. We also know American consumers are resilient. They shop around.

There's an enormous amount of transparency in the marketplace. There are some excess goods in some categories that we've heard some retailers talking about, maybe not food and energy yet. But so there are opportunities for consumers, although they're not as many as we need at the moment. So I think we should be optimistic

about some of those things. I was actually inattle the last couple of days at the global department store summit with several hundred ceos of retail companies around the world eric and pete nordstrom hosted it and it was a fabulous meeting and i think there's a fair amount of optimism recognizing their great challenges but thinking about partnerships with new new members new partners relationships working with consumers, applying everything that's been learned over the last two years to the uncertainty of the future and still finding ways to deliver value, serve customers, create jobs and be successful. That's good color. Matt, thank you very much for joining us. Thanks, Sarah. Nice to see you.

President of the National Retail Federation. What is Wall Street buzzing about today besides inflation? The Biden administration finally lifting its covid testing requirements for international travel makes traveling abroad a lot easier. The testing rule was initially put in place by the Trump administration back in 2021 and then tightened by Biden's White House in December. It will expire on Sunday. Travel executives have been pushing hard to scrap the mandate. This week, the CEOs of Marriott, Hilton and IHG explained why it matters so much. Listen. If we got rid of the testing requirement, I think you'd bring a lot more international travelers in.

And those travelers not only come here, but they spend a lot of money. They spend more than domestic travelers. For folks that maybe are not particularly experienced international travelers, it's one more thing that gives them pause. Travel stocks not really getting a lift from the news today, actually underperforming in the sell-off. And to tie it back to inflation, airfare prices were up 37% from last year in May. We'll see if increased international demand for travel on the back of this rule change pushes those fares even higher.

It does eliminate sort of burden to think about that you could get stuck abroad when it comes to booking international travel. Take a look at technology. One of the worst performing sectors today, Steve Kovac, here to look at the mega caps, which are dragging down tech. Steve. Yes, Sarah, that's right. Bad day for big tech. Let's start with Apple, down about 3% today. They came off their WWDC Developers Conference on Monday

and some bad news out of the UK today, saying that their app store policies around cloud gaming services are anti-competitive. So that's something to watch there, too. Moving on, let's go to Meta. Meta down also 3%. Some bad news coming out there also this week that they're putting similar hardware plans on Ice. These augmented reality glasses that they're planning to release in the next couple years, that got delayed,

and also a smartwatch delayed as well. Then there's Alphabet down about 2%, faring the best of the group. And let's move over to Microsoft, which had that big gaming announcement yesterday off 3%. And as always, Amazon is the laggard of the group. We've seen this all year and all last year, even. It's down a whopping 5%, Sarah. Steve Kovacs, Steve, thank you. How much damage, Mike, has been done to some of these mega cap tech names already? A lot of damage, and they're responsible for most of the aggregate downside. But you look at a Microsoft or an Apple, they're down mid-20s percent from their high. The overall NASDAQ composite is down almost 30 percent from its high. And coming into today, the average NASDAQ composite stock had been down at least 50 percent from a 52-week high.

So, in other words, some of the big guys have held up better than the rest, but the NASDAQ composite continues to modestly underperform. Now, relative to its lows from the recent sell-off, it still is up a couple of percent. Interestingly, on the S&P 500, the intraday low today, 3,900.6. The closing low from May 20, three weeks ago, basically thirty nine hundred. So it's basically revisited the closing low. We're up about three quarters of a percent from there. Just a little bit of relieving of the pressure as the day has gone on. Bond markets have closed, although the damage there has been done as well, where you have Treasury yields

pushing their highs for this this sell off the 10year now at 316. The two-year note also above 3% for the first time in a few years. Also seeing oil probably going mostly under a mark because it's not really in the epicenter of what's happening today, but down almost 1%. So some of the demand concerns and some of the growth worries are sort of evident along with the inflation fear, Sarah. Mike, thank you for running us through some of the charts. For more on today's sell-off, let's bring in Rebecca Patterson, chief investment strategist at Bridgewater Associates. And Rebecca, you guys at Bridgewater have been expecting inflation to remain stubbornly high. I'm not sure if you expected it to actually increase from the levels we were already at. What was your reaction today? Well, this is largely what we expected, not necessarily each wiggle each month, but looking

for inflation in the United States to be higher for longer, significantly more than both what the Fed is forecasting and what the market's discounting. And that really comes back to a few pieces of inflation. The labor market is probably the big one. We still see 60 percent of U.S. companies saying they can't find qualified workers. So if they want to get the workers they need, that puts upward pressure on wages. And as the service sector benefits from reopening, those higher wages are going to be even more in play. So that's sticky in our view. Housing, we are seeing housing demand starting to cool a little bit with higher mortgage rates, but house prices and particularly rents are still biased higher because we just don't have the supply and they can get that and the consumer can still handle it because of balance sheets. So

that's sticky. And the last one to watch, of course, is commodity prices. You noted oil down a little bit today, but when we take a broader look at supply and demand for a lot of commodities, we still see a bias higher for prices there and not seeing that fix anytime soon. So we're still in the camp that inflation is going to be a problem for the Fed. And that means you either need to have inflation sensitive assets in your portfolio or you need a position for more Fed tightening, which is quickly getting priced in. Yeah. so on oil, let's just take that one, because gas prices hit a new record of just below $5 a barrel nationwide, highest ever. We're seeing the seventh week in a row of gains for WTI crude. What happens to the consumer in this environment, Rebecca, and are you guys positioning for recession? Yeah, so I think one thing that's really different

about the environment we're in today is the gap between nominal and real in the economy. You know, Sarah, you're younger than me, but we both grew up where real and nominal were basically the same thing because inflation was so low. Today, there's a huge gap between the real economy and nominal economy, and that difference is inflation. So when we look ahead, nominal demand is still relatively strong. We see that coming through equity earnings, but the real economy is starting to get hit from this inflation, the erosion of purchasing power, especially in those lower income households. When we put that together, we think that even with the nominal strength, we're going to see the real economy likely go into a contraction in 2023. The question is just going to be how deep. We

actually think in this environment, the bigger risk is to financial assets more than the real economy. So how deep and what to do with your stock portfolio in this environment? I will note that staples are outperforming today. They're up a third of 1%, and utilities just popped into the green as well. So there's clearly some slowdown pricing in here. Yeah. So a lot of it is going to come down to the Fed. And if they decide to continue lagging economic conditions, or they decide to get more aggressive, and it's really a difficult decision for them. Because if you're more aggressive, greater the risk that you trigger a recession. If you lag conditions, inflation stays higher than you'd like and you risk your inflation fighting credibility. So they can't win. Our view is that they're more likely to lag

economic conditions and so inflation will stay somewhat higher and stickier. And that would suggest a recession that isn't particularly deep. That said, it doesn't mean equities are unscathed. We estimate that about 40 percent of the U.S. equity market is highly sensitive to liquidity conditions. And as the Fed does tighten and we start to see that balance sheet roll off, we think those stocks are going to continue to be at risk. And if the equity continues, pardon me, the economy, excuse me, long week, continues to moderate, then the next leg lower for equities isn't the discount rates they've adjusted. It would be the earnings and the cash flow expectations. We haven't seen that shift yet. That would be the next leg to watch. Right. So is there any part of the stock market that you guys like now?

Well, we're actually seeing better opportunities in equities overseas than in the United States. We are modestly short U.S. equities. We're roughly neutral equities overall. We have been looking at economies where valuations are less demanding, where policymakers have more room to help if needed, where inflation isn't as aggressive for policymakers. And so places like Japan, and I'm going to say it, China, to us look more attractive from an equity point of view relative to the United States right now. Gold, I will also note just really quickly, gold is up 4%. Rebecca, how much of your portfolio should you have in gold right now? Does that make sense? Yeah, we have a modest long gold position in our portfolios and we have had for some time.

We want to have a diversified basket of commodity positions to help our portfolio in this world where inflation is a bigger driver of markets relative to growth. And gold, I think, is a good piece of that. Gold tends to lag cyclical commodities when you have rising real interest rates. And we've seen that play out this year. But if inflation expectations get unhinged, if the Fed lags conditions and inflation is higher, if the dollar starts to come under threat, then I think gold could perform much more strongly. So it is something we want to have in a portfolio as part of a diversified commodity basket. Definitely credibility questions and higher inflation expectations, though you are seeing a stronger dollar today.

And I'll just clarify, when I say gold up 4%, that's the gold stocks, the subsector of the S&P, gold, the commodity up about 1, 1.5%. Rebecca, thank you. Rebecca Patterson, we're going to go straight here into the closing bell market zone. Commercial break free here as we monitor this big sell-off. CNBC Senior Markets Commentator Mike Santoli here to break down these crucial moments of the trading day. As always, Frank Holland with us on DocuScience Big Plunge and Barclays Jonathan Miller on why he is now expecting a 75 basis point hike from the Fed next week. First off, stocks under pressure after this morning's CPI data showed hotter than expected inflation persisting in the United States, Mike. And the markets have clearly adjusted to this on top of what has already been a pretty difficult period.

How long do you expect this move to last us? Is this the new regime we're in now for coming weeks and months? It's very tough to say, Sarah, because I don't think, first of all, this is May data. We knew more or less how this was going to look. We just didn't get lucky with it. And I think it's only three months out of the last 24 that economists have been high enough in their estimate of CPI inflation. So clearly the market's still trying to catch up to what the prices have already done. Obviously, the Fed is in a similar spot right now. And, you know,

have we now finally gotten to a point where the Fed path is reasonably priced? It's tough to have confidence in that because you're not going to know for multiple months whether you have a downtrend. So that all being the case, I do say investors have remained fairly defensive. There's not been a lot of folks saying this is absolutely a bottom right here or three weeks ago. That's a very small net positive or at least not a negative. But it's tough to actually hang your hat on just the fact that people are worried, they're scared and they recognize the challenges. We are seeing some pockets of strength here to your point. Food, retail, tobacco, which is higher. We saw very strong pricing there for tobacco in the report today.

The market is lower, but DocuSign hit even harder. Shares getting decimated after reporting weaker than expected earnings and second quarter and full year outlooks. Pretty much in line with expectations. The company also issuing disappointing billings growth guidance. And that was a topic CEO Dan Springer discussed this morning on Tech Check. Listen. We had that incredible acceleration that occurred from the pandemic where we sort of doubled our rate of growth. And we really doubled the size of the company in about 18, 20 months.

And so now, as we see that there was so much demand that our customers were pulling forward, and they're now saying, hey, we still love DocuSign. They're not leaving us. They know we're the clear leader and we have the best technology in the space. They're saying saying, hey, we still love DocuSign. They're not leaving us. They know we're the clear leader and we have the best technology in the space. They're saying, I just got a lot of DocuSign. We have to manage through that adjustment. Frank Holland joins us.

Frank, the pull forward from the pandemic. Companies like this are just struggling to adjust to what is the new normal. Were they just way too optimistic? You know, I mean, Sarah, that's the only thing that you can say here. On the call last night, CEO Dan Springer, he said some key words I want to read off to you. One of them was assume.

The other one was unreasonable expectations. He flat out admitted that the company just assumed that its pre-pandemic growth would continue after the pandemic. If you look at its billings growth since it became a publicly traded company, you see in the mid to high 30 percent even last fiscal year. And then initially last quarter, they got it for about 14 percent billings growth for the full year. Now they drop that down to six percent. And Springer on the call and as well on tech check, he just said they didn't account for that pull forward effective sales that so many companies are basically adjusting to, including most notably Target this week. They're trying to figure out how to deal with that pull-forward effect.

And Springer said their customers just flat-out told DocuSign, we're not growing at the pace we were during the pandemic, so we're not going to spend at the pace we were during the pandemic, and we're going to spend less with you. Another thing is macro factors. He hit on them generally, didn't really touch on them very specifically. And the company said they don't see any real material impact when it comes to the stronger dollar, but they're definitely seeing a material impact when it comes to rising rates.

If you look at the impact of the 10-year yield on all cloud stocks this week, you just see the relationship there. And then you have to look at what analysts are saying about this stock. They're definitely not helping. Dan Ives from Wedbush, friend of your show, he called it a debacle that speaks to darker growth days ahead. B of A saying that macro issues only add to execution issues. Evercore putting a point on those execution issues, saying that a high turnover in the sales team is also an issue that will lead to more problems with billing. So a lot of issues here with DocuSign and a lot of questions about the growth of what's supposed to be a growth stock. Yeah, going back to levels that are basically where they were at the beginning of the pandemic.

Frank Holland, Frank, thank you. Mike, down almost 80 percent from the highs for DocuSign. It's not just a multiple correction on this one. It's the growth story over fundamental rethink of whether they can grow, right? Right. I mean, right now we're looking at, you know, low double digit sales and earnings growth for the next fiscal year and the one beyond, that's fine. And one of my rules for any software tool or application is the upside case is that it ultimately becomes something incredibly boring and invisible that nobody pays much attention to, and it's just a utility, and it's just there, and it grows kind of GDP plus something. And that's where we are, and that's fine, except DocuSign is still at 35 times the earnings estimates that are out there for a double digit, you know, low double digit grower.

So that's why it's tough to make the numbers work. That doesn't mean that it has to collapse from here, but it just it suggests that there's a reality check that's gone on repeatedly across software. DocuSign, Mike, not the only former pandemic winner getting hit today. We're watching Netflix, eBay, Roblox. They're all plunging after being downgraded to sell at Goldman Sachs. The firm says the downgrades are driven by increased focus on profitability and much lower investor tolerance of longer-term investments, given the uncertain macro environment.

Goldman reiterating Amazon as its top pick for 2022, though that stock also down here about five and a half percent today. I feel like it's a little late for this sort of strategy advice. That's what's been working all year. But maybe with this renewed focus on higher inflation and even higher interest rates, that's still the move. Go to profitable, cash flow positive companies that aren't investing big in the long term. Yeah, it seems like it's kind of marking the analyst's call to market in a sense. I mean, you've seen the valuation compression. If you want to say that macro pressures are going to have a bigger effect on consumers' willingness to pay up for the premium subscriptions on Netflix

or in-app purchases on Roblox or whatever, maybe so. I don't know how hard it is to model that out. Netflix is interesting. The street kind of hates it now because it's really badly disappointed a couple of quarters in a row right now. And it looks like a routinely kind of market valuation, basically. It's fairly valued along with the market

as opposed to having that premium. It just seems like it has no real catalyst out there to change the story right away. But are you seeing anything interesting action? For instance, Mike, there are a number of winners today. I mentioned some of the gold plays. Newmont is at the top of the market. Cardinal Health, you've got the Hershey and Kellogg, but CME Group is higher. Just any clues as to if we go into a new regime, maybe it's stagflationary, maybe it's recessionary.

What might work for people? I mean, today I basically see it as a fairly textbook by, you know, the predictable and by the reliable and the defensive. And that's not necessarily something that tells me that's going to be the rule from here on out, but it is what happens when you have the combination of yields going up and people all of a sudden starting to worry about whether the Fed's going to have to choke off growth more than they would otherwise. Health care, parts of health care have actually been sort of stealthily starting to take

the lead. So that's not necessarily a one day wonder. Yeah, Molina health care higher. CDS is higher as well in today's trade. The volatility plays. Some of the energy plays also still doing really well today. HES is higher again, continues its march up. Big call from Barclays today on the Fed, given those hot inflation numbers. Now expecting a 75 basis point hike at next week's Fed meeting. Joining us now is the economist behind that call, Jonathan Miller. Jonathan, I guess it surprised everyone and it will surprise the Fed even to get such a hot number. But as Roger Ferguson told us earlier, market expectations, they don't necessarily want to shock.

That's not where the market is. It's not what they've been laying the groundwork for. Right. Well, I think that this is one of those circumstances that actually may require the Fed to surprise the markets. What we saw in the data today was just a very broad-based increase in CPI. It wasn't much in the way of silver linings. It does look like there's not much sign that we've hit a peak in terms of inflation. And perhaps more concerning today, the Michigan survey data showing increase in longer-term inflation expectations, which has to have the Fed worry about their own credibility. So it does seem to us that they're going to prioritize having to get in front of this and to try and

reinforce their credibility with an aggressive move up here. So you've laid out the case of why they should do that. But do you actually think they will do that, knowing this Fed and knowing how careful Fed Chair Powell is to telegraph all of the moves and to prepare the market for everything? Doesn't it seem more likely that he would hike 50 and lay the groundwork for 75 or at least leave that option open this time, which he did not do last time? Well, we think that's a possibility as well. We do think that a 75 is likely either in this meeting or in the July meeting. But we think that the argument for doing it now is stronger. It has the biggest bang for the buck in terms of the effect on the yield curve, and it also

sends the strongest message that the Fed is very serious about reinforcing inflationary pressures. But you're absolutely right. The Fed is always reluctant in a hiking cycle to surprise the markets. Surprise. But I think that this is one of those circumstances that actually calls for an aggressive action that does surprise the markets. Either way, we're going to have the hawkish rhetoric come back up. Expect Bullard probably and others to come out and say we're going to have to do more than even expected.

What's going to be the impact on the economy, do you think? Well, it seems for now that the economy is holding up pretty well. But, I mean, this is one thing that the Fed may have to just live with. They're going to create a much bigger problem for themselves if they're not aggressive here, because if inflation expectations start slipping, their job is just much, much harder, and they're going to find themselves falling farther and farther behind the curve. It does seem to us that they want to position themselves to address inflationary pressures if they prove to be more prolonged. And the best way to do that is to get out in front of things

and move the policy stance further towards neutral, and then they can react from there, depending on how inflation developments go. Mike, what would all this mean for the stock market if we do get either a 75 basis point hike next week or talk of it at the next meeting? I think it leaves the stock market in the place it just about is already. It's interesting. I mean, the market seems impatient about all this, and investors are impatient,

and they feel like they would love it if you could just get it over with. Wherever we're going to go, let's just get there. I'm not sure the Fed thinks about it that way. And they also, I think, very much relish their ability to use forward guidance to get what they want into the market. Look at over the last six months. You get the two year note, you'll go from half a percent to three percent. And they just started hiking a couple of times ago. So it seems like they would like to be able to march us through this.

You have mortgage rates at 585 right now for 30 year fixed. I mean, they realize that that has an effect, even if they don't move so fast. So maybe 75 somewhere in the next couple makes sense. I just don't know if they want to do it next week when they could do it six weeks later. Got it. Jonathan, thank you for joining us with that call today. A lot of people on Wall Street talking about it from Barclays. Stocks are in sell-off mode.

The Dow's down about 777 points right now. S&P and Nasdaq also on track for their worst performance now since January and just continuing a very long losing streak. Joining us is Eric Friedman, U.S. Bank Asset Management Chief Investment Officer. Eric, what are you guys doing with stocks right now? Yes, Sarah, we've been in more cautious defensive mode. We think that the areas you really want to be in are utilities, infrastructure, and energy. Generally, boring parts of the market, but boring is pretty good right now.

So our viewpoint has been really to emphasize infrastructure, real assets. Also, we've been warming up to short duration fixed income really is more of a safe haven as opposed to a place to make a lot of capital. So we do think that the bias for the Fed next week will be tightening and the opportunity for better returns in equity market is probably a couple months out. So we'd be still in more defensive mode than aggressive mode at current levels. A couple months out. Talk to me about that, Eric. How will you know when you want to start buying again for your clients? Yeah, I think a couple things. Number one is that this does boil down to the Fed and their forward guidance.

And it seems like a generic thing to talk about because everyone's talking about it. But again, your prior guest mentioned it. The Fed goes to 75 basis points. There's a repricing that has to happen just as a function of interest rates. When interest rates go up, assets have to reprice. The second repricing would be if we start to see consumers weakening. And that's the swing part that we think will be really important. We did see evidence that there has been a decline in savings. So it does appear that consumers may be getting a little

bit stretched. And if the Fed realizes that some of their tightening techniques are actually providing a greater headwind than they want, that could be the time that we step in and get more aggressive. So we do think for the next couple of meetings, this will be a bit of a trial balloon from the Fed and that investors don't have to be in a great rush to add risk to their portfolio. So again, watch the consumer data. Watch reactions from the Fed. We still think that's a multi-week story as opposed to a today or tomorrow story. Down 2.7% on the S&P.

You say you like real assets. So you're talking about stocks of energy and infrastructure plays? Yeah, I think for equity investors, and certainly that's a big part of your viewership, utilities, infrastructure, which you can own an ETF form, as well as energy, even though energy feels stretched. We just think that gap between drillers, there's just not a lot of people out looking for oil right now for lots of different reasons. So we still think that an equity relative, we'd still be involved in those sectors in particular. We do think, and again, this sounds maybe a bit boring and prosaic, but even things like short-duration municipal bonds, those have gotten crushed. Those start to look more attractive. So we would certainly encourage people, while stocks are very familiar, this is a time to really be more in touch with the global macro environment.

And certainly there are things beyond stocks that you can own. So those would be a couple of things we're focused on right now. Eric Friedman, thanks for joining us with the tips. U.S. Bank Asset Management. We've got less than two minutes to go here in the trading day, down more than 800 now. Mike, what do you see in the internals? Yeah, it's pretty lopsided to the downside, as you would expect, Sarah. About 85% of New York Stock Exchange volume is in declining stocks. Not quite to 90, but that's a pretty good watch. Take a look at the banks relative to the transports on a year-to-date basis. They're basically tracking one another right now, showing you that the slowdown story, the pinch of energy prices and maybe some erosion of credit and

risk to the economic outlook, they're getting priced in. Not saying it's all the way there, but both of those groups are underperforming the broader tape at this point. The volatility index has perked up. It's under 28. You know, arguably it's been underreacting, but we are in summer and this has been a relatively slow bleed in the market. So it's not necessarily causing that quick short term panic. And we're, you know, we're going to be in July in the 30 day window that the VIX covers there. As we go into the close, we're down 830 points on the Dow. Pretty fierce reaction to that inflation surprise this morning coming in even hotter than expected. The Nasdaq's down 3.4 percent.

It's down 5.5 percent for the week. For the Dow, the S&P and the Nasdaq, we are tracking for our worst week since back in January. And just adding to the string of declines, we've seen nine out of the last ten for the S&P and the Nasdaq. You do have some pockets of strength in some of the more defensive staple type names like Food Company, Walmart, for instance. But overall, it is a sea of red with the S&P going out today with a decline of about 3%. That's going to do it for me on Closing Bell. Have a great weekend, everyone.

Now into overtime with Scott Wachner.