(Bloomberg) — US stocks pared losses Tuesday as record inflation accelerated in Europe, intensifying the debate over how quickly central banks will raise interest rates in response.
The S&P 500 was little changed, led by gains in energy, while the Nasdaq 100 added 0.5% and Europe’s Stoxx 600 Index ended lower.
Euro-zone consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey.
Meanwhile, WTI crude oil rose to $117 barrel after the European Union agreed to pursue a partial ban on Russian oil. Treasury yields climbed across the curve, joining the selloff in German bunds and European bonds.
The dollar advanced.
Fears central-bank rate hikes may tip the economy into a recession are keeping investors watchful as rising food and energy costs squeeze consumers. US stocks are on track to end the month with modest gains amid skepticism about whether the market is near a trough and as volatility stays elevated.
The S&P 500 posted gains of 1% or more four out of the five trading days last week, but many see the rally as short lived with expectations of aggressive Fed rate hikes on the horizon. Swaps show traders have almost fully priced in two half-point rate increases in June and July, with even odds of a third such hike in September.
“When you throw-in the likelihood that earnings estimates are going to have go be cut in a significant way as we move through the summer, it emboldens our view that the stock market will have to see lower-lows before the ultimate bottom for this decline is reached,” Matt Maley, chief market strategist at Miller Tabak + Co., said.
Federal Reserve Chair Jerome Powell is expected to meet President Joe Biden in a rare Oval office meeting on Tuesday to discuss inflation ahead of US payroll numbers later this week.
The meeting comes after Fed Governor Christopher Waller said Monday he wants to keep raising rates in half-percentage point steps until inflation is easing back toward the central bank’s goal.
“What remains critical is that even though the Federal Reserve is likely to remain hawkish until the peak in interest rates and the Fed balance sheet reduction — both of which are expected in September — inflation expectations are plummeting and nominal rates are cooling down,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note.
“We sense not only are we passing ‘peak Fed’ but that more positive catalysts will arrive by the fourth quarter as inflation decelerates, China stimulus accelerates and the US midterm election campaigns heat up.”
Among individual stock moves, Deutsche Bank AG slipped after the lender and its asset management unit had their Frankfurt offices raided by police.
Unilever Plc jumped as activist investor Nelson Peltz joined its board. US energy stocks rose following the advance in crude oil prices. And US-listed Chinese stocks also climbed, on track to wipe out their monthly losses as easing in lockdown measures in major cities and better-than-expected economic data reassured investors.
“Despite a potential strong finish to a historically weak month, the SPX is still coming into June with a loss of more than 10%,” Craig W.
Johnson, chief market technician at Piper Sandler, said in a note. “The good news is that for similar performance years, the index has historically rebounded into year-end. For years with losses of more than 10% from January to May, the SPX has posted average and median June to December returns of 6.3% and 5.8%, respectively.”
Elsewhere, Bitcoin was back above $32,000 as investors and strategists said the digital currency is showing signs of bottoming out.
How will markets be affected by the Fed’s quantitative tightening?
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Here are some key events to watch this week:
- The Federal Reserve is set to start shrinking its $8.9 trillion balance sheet Wednesday
- The Fed releases its Beige Book report on regional economic conditions Wednesday
- New York Fed President John Williams, St.
Louis Fed President James Bullard speak at separate events Wednesday
- OPEC+ virtual meeting Wednesday
- Cleveland Fed President Loretta Mester discusses the economic outlook Thursday
- US May employment report Friday
- The UN’s Food and Agriculture Organization releases its monthly food price index at a time of maximum concern about global supplies on Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 12:43 p.m.
New York time
- The Nasdaq 100 rose 0.5%
- The Dow Jones Industrial Average fell 0.1%
- The MSCI World index fell 0.2%
Currencies
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro fell 0.4% to $1.0732
- The British pound fell 0.3% to $1.2613
- The Japanese yen fell 0.8% to 128.58 per dollar
Bonds
- The yield on 10-year Treasuries advanced 10 basis points to 2.84%
- Germany’s 10-year yield advanced seven basis points to 1.12%
- Britain’s 10-year yield advanced 11 basis points to 2.10%
Commodities
- West Texas Intermediate crude rose 2.3% to $117.67 a barrel
- Gold futures fell 0.5% to $1,847.30 an ounce
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