US stocks hurtled toward a bear market, Treasury yields spiked to levels not seen in a decade and the dollar powered higher as the fallout from a hot inflation reading continued to rattle financial markets already shaken by worries the Federal Reserve will plunge the economy into a recession.
Another brutal bout of equity selling sent the S&P 500 to the lowest in 15 months and down more than 20% from its January record. Highly valued technology shares bore the brunt of the rout, with the Nasdaq 100 slumping over 4%. The Cboe Volatility Index jumped above 30 and the futures curve inverted in a rare instance of traders pricing in more uncertainty in the here-and-now than in three months. Speculative areas of the market inflated by years of Fed and government largesse buckled. Profitless software firms, newly public companies and blank-check entities sold off. Bitcoin plummeted below $24,000 after a lending platform ceased operations, roiling the crypto world.
Credit markets continued their historic repricing of rate trajectories. Treasury 10-year yields climbed to the highest since 2011 while two-year rates jumped to levels last seen before the 2008 crisis. A closely watched part of the bond curve inverted as worries mounted that an aggressive Fed won’t be able to avoid an economic contraction. A recession-signaling indicator in the credit market has jumped the most since 2020 as investors pile into contracts insuring against defaults among the most-precarious corporate borrowers. Only the dollar provided a respite from the selloff, as the greenback had its biggest four-day rally since the onset of the pandemic.
“It’s going to get a little uglier,” said Victoria Greene, chief investment officer at G Squared Private Wealth. “It’s going to be very hard for stocks to rally when the Fed continues to put hawkish pressure. There’s no way they can slam on the brakes with inflation without slamming on the brakes economically speaking. It’s funny we still have recession deniers.”
Financial markets are now bracing for the Fed to turn extremely hawkish after its meeting Wednesday. Traders are now pricing in 175 basis points of tightening by September — implying two half-point and one 75 basis points hike. If that comes to pass, it would be the first time since 1994 the Fed resorted to such an aggressive pace. Fed officials are muzzled before the decision in two days and Chair Jerome Powell’s conference, where policy makers’ characterization of inflation and long-term forecasts for the fed funds target — the so-called dot plot — will be critical.
Even after this year’s selloff, equities are still not fully reflecting the risks facing corporate earnings and weaker consumer demand, according to strategists at Morgan Stanley and Goldman Sachs Group Inc. US stocks might find it tough to post a meaningful rebound without a broad rout accompanied by heavy volumes, noted Evercore ISI strategist Julian Emanuel. “What’s been missing the last several months is sort of what I would call a ‘cathartic flush out,’ where you get the VIX above 40, which is one of the things you need for at least a trading bottom,” he added.
- “The idea that there is some Goldilocks outcome in the cards or soft landing is a mockery,” wrote Danielle DiMartino Booth, chief strategist of Quill Intelligence. “While tightening into a recession is no easy task, the Federal Reserve must indicate a willingness to raise interest rates by more than a half-percentage point at upcoming meetings if inflation continues to surprise to the upside.”
- “Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” wrote Mark Hamrick, senior economic analyst at Bankrate.com. “This year’s decline in stock prices and rise in bond yields are among the more obvious consequences of the Fed’s actions.”
- “There has been no follow-through by the bulls,” wrote JC O’Hara, chief market technician at MKM Partners. “Until they have a data point to celebrate, investors will continue to shed risk assets. The largest risk now is that interest-rate expectations are still too low and earnings expectations are still too high.”
The damage in the highly speculative crypto market took on staggering contours, as the value of all assets sank below $1 trillion, down by two-thirds from the heady levels reached last fall. Bitcoin and its cousins have largely tracked risk assets, but the latest leg down — as much as 17% for Bitcoin, double that for other large tokens — came with concern that the freezing of withdrawals at the Celsius lending platform might indicate systemic risk in the crypto ecosystem that could accelerate the meltdown.
“You can’t have these massive drawdowns without some real damage being done and real money being lost,” said Art Hogan, chief market strategist at National Securities. “The volatility is inherent in both directions.”
What to watch this week:
- US PPI, Tuesday.
- China key economic activity data, liquidity operations, medium-term lending facility, Wednesday.
- FOMC rate decision, Chair Jerome Powell briefing, US business inventories, empire manufacturing, retail sales, Wednesday.
- ECB President Christine Lagarde due to speak, Wednesday.
- Bank of England rate decision, Thursday.
- US housing starts, initial jobless claims, Thursday.
- Bank of Japan policy decision, Friday.
- Eurozone CPI, Friday.
- US Conference Board leading index, industrial production, Friday
Some of the main moves in markets:
- The S&P 500 fell 2.8% as of 12:12 p.m. New York time
- The Nasdaq 100 fell 3.4%
- The Dow Jones Industrial Average fell 2%
- The MSCI World index fell 3%
- The Bloomberg Dollar Spot Index rose 0.8%
- The euro fell 0.7% to $1.0446
- The British pound fell 1.1% to $1.2178
- The Japanese yen rose 0.3% to 134.05 per dollar
- The yield on 10-year Treasuries advanced 18 basis points to 3.33%
- Germany’s 10-year yield advanced 12 basis points to 1.63%
- Britain’s 10-year yield advanced eight basis points to 2.53%
- West Texas Intermediate crude rose 0.5% to $121.25 a barrel
- Gold futures fell 2.3% to $1,832.30 an ounce