Stocks fell ahead of the June inflation report, with the Treasury’s inversion of the curve deepening to levels last seen in 2007 amid concerns that a rate hike would plunge the economy into recession.
The S&P 500 extended losses for a third day as tech megacaps sold off and energy stocks joined oil’s decline. The 10-year U.S. Treasury yield fell as much as 12 basis points below the two-year yield. So-called curve inversions are a potential harbinger of an economic contraction.
Economists say inflation continued to heat up in June, reaching a pandemic peak that will prompt the Federal Reserve to prepare for another big hike. The consumer price index, due on Wednesday, is likely to have risen 8.8 percent from a year earlier, the biggest jump since 1981, according to the average forecast in a Bloomberg survey.
“The market is showing nervousness about what this is going to look like,” said Patrick Kaser, portfolio manager at Brandywine Global. “There has been talk of commodity prices falling, but we are yet to see that happen. We still expect that number to be quite high.”
Traders also kept a close eye on the dollar, which has fluctuated since hitting its highest since the COVID-19 panic in March 2020. For now, a wall of derivatives bets is preventing the euro from reaching parity with the greenback for the first time in two decades .
The impact of the US currency surge will also be closely watched during earnings season. PepsiCo Inc., one of the first major industry players to report second-quarter results, said demand remained steady despite inflation — but highlighted foreign currency translation headwinds.
“In the current environment, the dollar’s strength is a sign of investor concerns about a global recession as it signals a flight to the relative safety of the world’s reserve currency,” wrote Nicholas Collas, co-founder of DataTrek Research. “Until the dollar starts to weaken, it’s hard to believe that 2022 is going to be a good year for U.S. stocks.”
In other corporate news, American Airlines Group Inc. jumped as the carrier stuck to its expectations for a jump in sales in the second quarter, underscoring the strength of travel demand. Amazon.com Inc.’s Prime Day sale lures bargain hunters looking to stock up on closet and cheap electronics despite the dearth of deals.
Trading revenue at Wall Street’s five biggest banks likely rose 16 percent to $27.8 billion in the second quarter, according to analyst estimates compiled by Bloomberg. This surge will come as a result of market volatility caused by recession fears, rising inflation and global turmoil.
Sam Zell, the billionaire who became famous for his real estate deals, said the central bank’s actions to flood the market with money in recent years were coming back to bite the economy. He called on Fed Chairman Jerome Powell to raise interest rates by as much as 75 basis points and “destroy the inflation mentality.”
“The Fed and other central banks are still very much focused on getting real inflation back, but every other indicator we have of inflation shows that this should no longer be our main concern and we should be more concerned about slowing growth said Brian Nick, chief investment strategist at Nuveen.
Elsewhere, Bitcoin slipped back below US$20,000 after last week’s rally.
What to watch this week:
- Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo
- New Zealand interest rate decision Wednesday
- US CPI data, Wednesday
- Federal Reserve Beige Book, Wednesday
- US PPI, Jobless Claims, Thursday
- China’s GDP, Friday
- US Business Inventories, Industrial Production, University of Michigan Consumer Sentiment, Empire Manufacturing, Retail Sales, Friday
- G20 finance ministers and central bankers are meeting in Bali from Friday
- Atlanta Federal Reserve President Rafael Bostick speaks Friday
Some of the major moves in the markets:
Stock up
- The S&P 500 was down 0.9% as of 4:00 p.m. New York time
- The Nasdaq 100 fell 1%.
- The Dow Jones Industrial Average fell 0.6%.
- The MSCI world index fell 0.8 percent
Currencies
- The Bloomberg Dollar Spot index was little changed
- The euro was little changed at US$1.0041
- The British pound was little changed at US$1.1894
- The Japanese yen rose 0.5% to 136.80 per dollar
Bonds
- The yield on the 10-year note fell three basis points to 2.96 percent
- Germany’s 10-year bond yield fell 11 basis points to 1.13 percent
- The yield on Britain’s 10-year bond fell 10 basis points to 2.07 percent
Goods
- West Texas Intermediate crude fell 8% to $95.80 a barrel
- Gold futures fell 0.4% to $1,724 an ounce
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