The Federal Reserve may have to choose between taming inflation and risking recession following last week’s faster-than-expected May CPI reading.
U.S. equity futures plunged lower Monday, while Treasury bond yields surged to the point where short-term rates signaled recession fears, as investors bet on faster and deeper rate hikes from the Federal Reserve following last week’s hotter-than-expected inflation data.
U.S. consumer prices rose by the fastest annual pace in more than four decades last month, the Commerce Department said, thanks in part to soaring energy and food prices. Core CPI, however, also marched higher on the surge in rent and used car components, putting paid to any suggestion that inflation dynamics are set to ease over the coming months.
The impact, in part, pulled the University of Michigan’s benchmark reading of consumer sentiment to an all-time low, but also likely stiffened the Federal Reserve’s resolve in terms of near-term rate hikes, although a quiet period ahead of the Wednesday policy meeting has prevented officials from making any public comments.
The CME Group’s FedWatch tool, however, now suggests a 23.6% chance that the Fed will deliver a surprise 75 basis point rate hike later this week, up from just 3.1% a week ago
Both Fed Chairman Jerome Powell and a host of his colleagues have indicated their preference for a series of half-point increases over the coming months, but last week’s faster-than-expected reading for May inflation has reignited bets for a 75 basis point move in July.
Should higher rates snuff out growth prospects in the world’s biggest economy, which is already flirting with recession following a 1.4% first quarter contraction, stocks are in for another notable decline, according to analysts at Morgan Stanley, who suggest the S&P 500 could fall to as low as 3,400 points before the current downturn in exhausted.
“Sentiment has changed dramatically as market participants have realized that we have a galloping food crisis due to Russia’s tactics in Ukraine, China could very well move in and out of lockdowns for months causing global supply shocks, and a recession is now very likely as the only option to kill demand and inflation,” said Saxo Bank strategists. “We remain negative and cautious on the US equity market and reiterating that commodities, logistics, cyber security, defence, and semiconductors are the best themes to be exposed to in 2022.”
The overnight surge in government bond yields lifted 10-year German paper to the highest levels since 2014, while pushing European stocks sharply lower, with the region-wide Stoxx 600 marked 2.28% lower in early Frankfurt trading.
Overnight in Asia, the Nikkei 225 fell 3%, the most in four months, while the yen tumbled to a fresh 20-year low of 134.58 against the U.S. dollar. The region-wide MSCI ex-Japan index was marked 2.83% lower heading into the final hours of trading.
In the U.S., benchmark 10-year Treasury bond yields leaped to 3.231% while 2-year notes hit 3.21%, the highest since 2007, causing a brief inversion of the yield curve in overnight trading.
On Wall Street, futures tied to the Dow Jones Industrial Average indicating a 530 point opening bell slump, pulling it to within touching distance of a 52-week low, while those linked the S&P 500 are priced for an 83 point decline. Futures linked to the tech-focused Nasdaq are looking at 330 point opening bell gain.
A big jump for the U.S. dollar in overnight trading, which took the greenback to a near 20-year high of 104.75 against a basket of its global peers, put downward pressure on oil markets just as U.S. gas prices hit the highest levels on record.
According to data from the AAA, the national average price for a gallon of gas was pegged at $5.014 on Sunday, the highest nominal cost on record and a 63% from the same period last year, thanks to a combination of dwindling domestic supplies, surging summer demand and the impact of Russia’s war on Ukraine on global crude markets.
WTI crude futures for July delivery slumped $2.05 in overnight trading to $118.62 per barrel, but are sill up nearly 60% for the year.
White House economic adviser Cecelia Rouse told CNN Friday that the Biden Administration is looking to work with oil companies and reduce the current refining backlog, while reports suggest President Joe Biden is preparing to visit Saudi Arabia and meet with Crown Prince Mohammed bin Salman next month
The surging dollar also helped hammer cryptocurrency prices over the weekend, with Bitcoin falling back below the lowest levels since December of 2020.
Bitcoin prices were last seen 12.1% lower on the session at $23,952.65, a move that extends its year-to-date decline to around 47.4%. The moves prompted cryptocurrency lender Celsius Network to freeze withdraws from its deposit base.