Stocks whipsawed as a shockingly hot U.S. inflation report rattled global financial markets, boosting bets the Federal Reserve could get even more aggressive with its belt-tightening campaign.
In a session of unnerving swings, the S&P 500 failed to close in the green after a sharp reversal from a 1.6% slide.
Also weighing on sentiment were hawkish signals from Fed Bank of Atlanta President Raphael Bostic, who said “everything is in play” to combat price pressures.
Treasury two-year yields, which are more sensitive to imminent Fed moves, climbed.
The euro snapped back after briefly falling below $1, while the loonie gained as the Bank of Canada raised rates by a full percentage point. Bitcoin rose amid a revival of its inflation-hedge appeal.
Swap markets now indicate that the likely outcome of the July Fed policy meeting is now a coin toss between a 75-basis-point hike and an even larger increase of 100 basis points.
The reason is that the biggest surge in the consumer price index since 1981 showed that an inflation peak may still be out of reach.
“The June CPI print is ugly across the board,” wrote Krishna Guha, vice chairman at Evercore ISI. “This is bad news for risk assets as it increases the likelihood that the Fed will keep raising rates rapidly and end up overshooting by enough to push the economy into recession.”
Bank of America Corp. economists forecast a “mild recession this year” in the U.S., saying services spending is slowing and hot inflation is spurring consumers to pull back.
They join Wells Fargo Investment Institute and Nomura Holdings Inc. in expecting a contraction in 2022. Deutsche Bank AG sees one starting in mid-2023.
The multiyear market mantra of TINA – there is no alternative to equities – is facing a major threat as bond yields are looking more attractive.
The percentage of S&P 500 members with a dividend yield higher than the 10-year U.S.
Treasury rate has fallen to the lowest since 2007. Payouts are under pressure as companies grapple with fears of recession, historically high inflation and supply constraints.
In corporate news, Delta Air Lines fell short of profit expectations in the second quarter and said high operating costs will persist through the rest of the year.
Spirit Airlines agreed to delay a planned shareholder vote yet again on a proposed acquisition by Frontier Group Holdings Inc.
Investors fixated on the looming risk of recession are about to get a crucial read on a question that’s been burning a hole through markets for months: whether bank earnings will show cracks forming in the economy.
Net interest income for the six largest U.S. lenders is expected to rise by roughly 15%, while at the same time mortgage and investment-banking revenue is projected to decline, according to data compiled by Bloomberg.
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