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U.S. stocks traded sharply lower Monday, with traders betting a fresh decades-high print on inflation will force the Federal Reserve to get even more aggressive than previously anticipated to help ease rising prices.
The S&P 500 and Nasdaq each dropped more than 2% shortly after the opening bell, extending losses from the overnight session. The S&P 500 also traded in bear market territory, with its intraday level setting it on track to end more than 20% below its recent record high from January. The Dow sank by more than 500 points, or about 1.8%. Treasury yields rose across the curve, and the benchmark 10-year yield jumped to its highest level since late 2018.
Cryptocurrency prices slid after digital currencies lender Celsius Network said Sunday it was pausing all withdrawals, swaps and transfers between accounts on its platform “due to extreme market conditions,” according to a statement. Bitcoin prices (BTC-USD) fell by more than 13% to below $24,000, or the lowest since December 2020, in the wake of the announcement, while Ethereum prices (ETH-USD) tumbled below $1,200. And crypto-related stocks including Coinbase (COIN) and MicroStrategy Incorporated (MSTR) also came under renewed selling pressure.
For the broader markets, investors nervously looked ahead the Federal Reserve’s latest policy-setting meeting later this week, with a rate decision set for Wednesday. Up until Friday’s hotter-than-expected monthly Consumer Price Index, traders widely believed the meeting would set the stage for another half-point rate hike by the central bank, bringing the target range for interest rates between 1.25% and 1.50%. However, after last week’s data showed an unexpected pick-up in inflation to a fresh 40-year high of 8.6% in May, investors have raised their bets on an even bigger move by the Fed.
Fed funds futures, which help track traders’ predictions for where the Fed’s target interest rate band will land, shifted quickly after Friday’s report and showed increased bets on an even more pronounced 75 basis point hike. As of Monday, Fed funds futures priced in an about 25% probability of three-quarter point hike and an around 75% probability of a 50 basis point hike, according to CME Group data. As recently as mid-last week, investors were pricing in a more than 90% probability that the Fed would opt for a 50 basis point rate hike.
“There is very little in the details of [Friday’s CPI] report to suggest that inflationary pressures are easing,” Michael Pearce, senior U.S. economist for Capital Economics, wrote in a note Friday. “The surge in energy prices this month means that headline inflation will remain close to 8.6% in June. Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50 bp [basis point] rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings.”
Such a super-sized rate hike would add more pressure to already-volatile stocks by further raising the cost of borrowing for businesses. But at the same time, equity markets have also remained in turmoil as investors have had to weigh whether inflation left to run at current decades-high rates will push the economy into a deeper downturn. Already, at least one survey has shown consumer sentiment plunged to its lowest level since at least the 1970s in the face of rising prices. And given all these uncertainties, the Fed may well choose to continue down its previously telegraphed path to implement only half-point hikes in the near-term, some economists said.
“This is not a quick process. But we also don’t want to disrupt the capital markets. And so I think moving steadily, in terms of 50 basis points, which is the messaging they’ve been giving the market, is the right course of action,” Hal Reynolds, Los Angeles Capital chief investment officer, told Yahoo Finance Live on Friday. “And they’re going to be data-driven, and they can continue to do that into the fall.”
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