(Bloomberg) — The selloff in global stocks sent the S&P 500 careening more than 20% from its January record as speculation that a more aggressive Federal Reserve policy to combat hot inflation could sink the economy into a recession.
Treasury yields surged to multi-year highs and the dollar strengthened versus major peers.
Another ugly session for equities left the US benchmark again on the brink of a bear market. The Cboe Volatility Index, known as Wall Street’s fear gauge, is pricing in more uncertainty in the here-and-now than it is in three months after a rare inversion of the futures curve.
Bitcoin plummeted below $24,000 as crypto assets sank. Treasury 10-year Treasury yields climbed to the highest since 2011 while two-year rates jumped to levels last seen before the 2008 crisis. The greenback had its biggest four-day rally since the onset of the pandemic.
The exodus from stocks and bonds is gaining momentum, with inversions across the Treasury curve pointing to fears the Fed won’t be able to stave off a hard landing.
Traders are now pricing in 175 basis points of Fed 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 a draconian measure.
All eyes will be on Wednesday’s Fed decision 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.
Read: Powell Facing Choice Between Elevated US Inflation and Recession
Comments:
- “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.”
- “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.”
- “Overall, 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.”
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:
Stocks
- The S&P 500 fell 2.6% as of 9:54 a.m.
New York time
- The Nasdaq 100 fell 2.9%
- The Dow Jones Industrial Average fell 2%
- The Stoxx Europe 600 fell 2.2%
- The MSCI World index fell 2.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.8%
- The euro fell 0.7% to $1.0441
- The British pound fell 1.1% to $1.2179
- The Japanese yen rose 0.5% to 133.69 per dollar
Bonds
- The yield on 10-year Treasuries advanced 13 basis points to 3.28%
- Germany’s 10-year yield advanced seven basis points to 1.59%
- Britain’s 10-year yield advanced one basis point to 2.46%
Commodities
- West Texas Intermediate crude fell 0.7% to $119.78 a barrel
- Gold futures fell 2.2% to $1,834.60 an ounce
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
