The Federal Reserve is expected to announce an interest rate hike this week. But by how much?
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The stock market tumbled again Monday—with the S&P 500 now falling into bear market territory. Bond yields jumped to new heights as fears about Federal Reserve rate hikes persist.
In afternoon trading, the
Dow Jones Industrial Average
fell 706 points, or 2.3%, while the
S&P 500
dropped 3.1%, and the
Nasdaq Composite
slumped 3.8%. This comes on top of declines last week, with the S&P 500 falling 6.3% from Tuesday’s close to Friday’s close.
The stock market has now fallen back to previous lows, which are in bear market territory, defined as a larger than 20% fall. The S&P 500 is trading just below 3800. It had fallen to just above that level on May 20, before bouncing back for a short period. If the index closes below 3837, it will have closed in bear market territory.
“Risk appetite globally has been hammered by a combination of resumed inflation fear and the presumed Fed response to it,” wrote Bespoke Investment Group strategists.
The 2-year Treasury yield, which attempts to forecast the levels of the federal-funds rate a couple of years from the present, rose to 3.21%, a new multi-year high. It has exploded higher from a pandemic-era low of just over 0.1%.
That comes as markets foresee more Fed rate hikes in the future. The Fed has been expected to lift the fed-funds rate by half of a percentage point in each of its summer meetings. But it’s now expected to lift rates in September after the central bank’s minutes had implied that slowing economic growth could compel the Fed to slow down its pace of rate hikes. Barclays economists now expect the Fed to lift the fed funds rate by three quarters of a point at its next meeting.
That’s because inflation is unrelenting.
Friday’s inflation reading showed that the consumer price index gained 8.6% year-over-year in May, above the prior reading of 8.3%. Soaring service prices, like hotel prices and airfares contributed, as did oil and food. Now, it seems the Fed has no choice but to remain aggressive in lifting rates.
“While the Federal Reserve is once again expected to raise interest rates on Wednesday, it’s clear their efforts so far this year are not helping to reduce inflation,” wrote Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence and former adviser to the president of the Dallas Fed. “The Federal Reserve needs to provide more clarity on its willingness to hike interest rates at an even steeper magnitude.”
As short-term rates race higher, it’s forcing a near inversion of the yield curve. That’s when short-term rates move above long-term rates. Today, that reflects that high inflation in the near-term will force the Fed to rapidly lift rates, eventually causing economic demand to get hit for the longer-term. The 10-year Treasury yield was trading at 3.34% Monday, near a multi-year high.
An inversion of the 2- and 10-year Treasury yields can often portend a recession within the next year or two, but not always.
Higher U.S. bond yields are also bringing the dollar higher. Global investors buy up dollars when U.S. financial assets become more attractive. The U.S. Dollar Index is up 0.8% to just over 104, around the level it hit May 12 and a multi-year high.
The stock market does not want to see a stronger dollar. A higher dollar means that when U.S. multinational companies translate their overseas revenue back into dollars, they accrue fewer dollars.
The hope is that the stock market is near a bottom, but that’s not entirely likely. As long as inflation remains problematically high, the Fed will stay in rate-hiking mode. As long as that’s the case, yields could move higher, which would bring stocks down even more. One key to inflation is wage increases, a result of companies looking to hire from a relatively small pool of applicants. Firms will keep prices high as long as they have to keep wages high.
“If the labor market starts to loosen up, inflation expectations will decline and 10 year yields will move lower,” wrote Dennis DeBusschere, founder of 22V Research. “At that point, investors could start thinking about being long risk assets again, but not before.”
Overseas, the pan-European Stoxx 600 fell 2.4% and Tokyo’s Nikkei 225 ended 3% lower.
Here are five stocks on the move Monday:
Tesla
(ticker: TSLA) stock was falling 4.9%, as the Nasdaq tumbles, even after the electric vehicle maker got upgraded to Outperform from Sector Perform at RBC.
Zendesk
(ZEN) stock dropped 8.4% after getting downgraded to Equal Weight from Overweight at Morgan Stanley.
Docusign
(DOCU) continued its larger tumble since September, down another 11% Monday, after getting downgraded to Underperform from Peer Perform at Wolfe Research.
Kosmos Energy
(KOS) stock fell 6.9% after the price of oil dropped, plus the stock got downgraded to Hold from Buy at Berenberg.
Micron Technology
(MU) stock dropped 5.9% after getting downgraded to Hold from Buy at Summit Insights.
Write to Jack Denton at [email protected] and Jacob Sonenshine at [email protected]
