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Stock selloff ramps up, yields spike on inflation

US stocks tumbled the most in three weeks and Treasury yields spiked higher after an unexpectedly hot inflation reading fueled bets the Federal Reserve will have to step up its battle against inflation.

The S&P 500 sank more than 2.5 per cent, leaving it on track for the ninth weekly drop in 10, as fears mounted that efforts to combat inflation risk stifling growth. Tech shares bore the brunt of Friday’s rout, with the Nasdaq 100 tumbling more than 3 per cent. Growth stocks from Cathie Wood’s flagship ETF to software developers and chipmakers plunged. A separate report showed US consumer sentiment dropped in early June to a record, adding to pressure on shares of airlines, casinos and hotels.

In the Treasury market, two-year rates soared to 3 per cent, a level not seen since 2008, narrowing the gap with the longer-dated maturities and indicating expectations for a faster pace of central-bank tightening. Bitcoin slide back below US$30,000, the Cboe Volatility Index surged to 29 and the dollar advanced.

Rates traders ramped up bets on Fed hike, with three half-point increases now likely over the June, July and September policy meetings, according to market-derived prices. The central bank has signaled it will likely raise rates by 50 basis points when it meets next week.

The consumer price index rose 1 per cent from a month earlier, topping all estimates. Shelter, food and gas were the largest contributors. The so-called core CPI, which strips out the more volatile food and energy components, rose 0.6 per cent from the prior month and 6 per cent from a year ago, also above forecasts.

“It is straightforward bad,” Dennis DeBusschere, the founder of 22V Research, said. “Flat month-over-month on core means more financial conditions tightening. Powell should sound pretty hawkish next week given the tight labor market and core CPI that didn’t fall month-over-month. The reaction in the front end was massive relative to long end.”

Separately, the University of Michigan’s preliminary June sentiment index fell to 50.2 from 58.4 in May, data released Friday showed. The figure was weaker than all estimates in a Bloomberg survey of economists which had a median forecast of 58.1.

Wall Street weighs in on inflation, rates and stocks

  • “From a Fed perspective, the chase continues, and more aggressive Fed measures will likely be needed to catch up to runaway inflation,” Charlie Ripley, senior investment strategist for Allianz Investment Management, wrote in a note. “Whether this translates to more aggressive hikes this summer, or a continuation of 50 basis point hikes this fall is the option for the Fed, but the overall reality for the Fed is that inflation is not under control, and they have their work cut out for them in the coming months.”
  • “One concerning development we’ve been seeing in prior inflation readings is that the stickier core components were beginning to catch fire – and we saw this accelerate with the latest core print,” said Max Gokhman, chief investment officer for AlphaTrAI. “That means Fed firefighters have to fight harder and that means stock bulls might get burned.”
  • “The CPI report is another reminder that equity markets will no longer be coddled by monetary policy,” John Lynch, chief investment officer at Comerica Wealth Management, said in a note. “We look for volatility to continue until equity markets accept that the Fed’s target rate gets to at least 3.0 per cent, and not obsess over the magnitude of incremental moves at the next several policy meetings.”
  • “Today’s report should extinguish any pretense that a ‘pause’ in rate hikes will likely be appropriate by the end of summer,” Jason Pride, chief investment officer of private wealth at Glenmede, said in a note. “Investors should expect the Federal Reserve to continue on its 50-bp rate hike path next week and beyond until inflation shows meaningful signs of decelerating toward the Fed’s 2–3 per cent target range.”

Some of the main moves in markets:

Inventory

  • The S&P 500 fell 2.5 per cent as of 12:11 pm New York time
  • The Nasdaq 100 fell 3.3 per cent
  • The Dow Jones Industrial Average fell 2.2 per cent
  • The MSCI World index fell 2.6 per cent

Currencies

  • The Bloomberg Dollar Spot Index pink 0.8 per cent
  • The euro fell 0.9 per cent to US$1.0520
  • The British pound fell 1.4 per cent to US$1.2323
  • The Japanese yen rose 0.1 per cent to 134.18 per dollar

Leaps

  • The yield on 10-year Treasuries advanced 12 basis points to 3.16 per cent
  • Germany’s 10-year yield advanced nine basis points to 1.52 per cent
  • Britain’s 10-year yield advanced 12 basis points to 2.45 per cent

Commodities

  • West Texas Intermediate crude fell 1.6 per cent to US$119.59 a barrel
  • Gold futures rose 1 per cent to US$1,871.30 an ounce

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