(Bloomberg) — Stocks slumped and bond yields climbed after a hotter-than-expected inflation report bolstered speculation on an aggressive Federal Reserve rate-hike path.
More than 90% of S&P 500 companies were in the red on Wednesday as the largest surge in consumer prices since 1981 showed that a peak in inflation may still be out of reach. The data fueled wagers that the central bank could boost rates by a full percentage point this month — raising the odds of a recession.
Treasury yields jumped, with the two-year rate — which is more sensitive to imminent changes in Fed policy — climbing as much as 16 basis points to about 3.21%. The dollar edged higher, while euro briefly fell below $1 for the first time since 2002.
The June CPI rose 9.1% from a year earlier in a broad-based advance. The widely followed inflation gauge increased 1.3% from the prior month, the most since 2005. Economists projected a 1.1% rise from May and an 8.8% year-over-year increase, based on the Bloomberg survey medians.
Comments on CPI:
- “The June CPI release was an ugly print, no getting around it,” said Cliff Hodge, chief investment officer at Cornerstone Financial. “The Fed has no choice but to follow through on a more aggressive path, which raises the probability of recession next year.”
- “Clearly we’re not out of the inflation woods yet,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley. “Another three-quarter percent hike from the Fed is pretty much a forgone conclusion at this point, and we’re likely in for a bumpy ride in the market.”
- “The only option available to the Fed is to slow economic growth enough to bring domestic demand down to meet constrained supply — possibly tipping the US into recession,” said Richard Flynn, managing director of Charles Schwab UK.
- “Inflation keeps heating up, defying expectations for a peak to be reached,” said Seema Shah, chief global strategist at Principal Global Investors. “We see rates moving to 4.25% next year as the Fed desperately attempts to recover from its earlier erroneous inflation read.”
- “Every month we wait for it to peak and are getting disappointed,” said Neil Birrell, chief investment officer at Premier Miton Investors. “Core inflation is the root of the problem, and this probably confirms a 75bps move by the Fed at the next meeting.”
Bank of America Corp. economists forecast a “mild recession this year” in the US, saying services spending is slowing and high inflation is spurring consumers to pull back. The economists expect fourth-quarter US gross domestic product to decline 1.4% from a year earlier, followed by a 1% increase in 2023.
Read: IMF to Cut Global Growth Forecast Again Amid ‘Darkened’ Outlook
The multi-year market mantra of TINA — there is no alternative to equities — is facing a major threat as bond yields are looking more attractive. The percentage of S&P 500 members with a dividend yield higher than the 10-year US Treasury rate has fallen to the lowest since 2007. Corporate payouts are under pressure as companies grapple with fears of recession, historically high inflation and supply constraints.
In corporate news, Delta Air Lines Inc. fell short of profit expectations in the second quarter and said high operating costs will persist through the rest of the year. Spirit Airlines Inc. agreed to delay a planned shareholder vote yet again on a proposed acquisition by Frontier Group Holdings Inc.
Investors fixated on the looming risk of recession are about to get a crucial read on a question that’s been burning a hole through markets for months: whether bank earnings will show cracks forming in the economy. Net interest income for the six largest US lenders is expected to rise by roughly 15%, while at the same time mortgage and investment-banking revenue is projected to decline, according to data compiled by Bloomberg.
Read: Higher Oil Prices Are Poised to Last for Months, If Not Years
What to watch this week:
- Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo
- US PPI, jobless claims, Thursday
- China GDP, Friday
- US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday
- G-20 finance ministers, central bankers meet in Bali, from Friday
- Atlanta Fed President Raphael Bostic speaks, Friday
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Some of the main moves in markets:
Stocks
- The S&P 500 fell 1% as of 9:47 a.m. New York time
- The Nasdaq 100 fell 1.2%
- The Dow Jones Industrial Average fell 0.9%
- The Stoxx Europe 600 fell 1.3%
- The MSCI World index fell 0.9%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro fell 0.1% to $1.0023
- The British pound fell 0.2% to $1.1871
- The Japanese yen fell 0.4% to 137.47 per dollar
Bonds
- The yield on 10-year Treasuries advanced four basis points to 3.01%
- Germany’s 10-year yield advanced four basis points to 1.17%
- Britain’s 10-year yield advanced two basis points to 2.10%
Commodities
- West Texas Intermediate crude rose 0.6% to $96.42 a barrel
- Gold futures were little changed
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