Shares ended in a downturn as a shocking inflation report in the U.S. shook financial markets, pushing bets that the Federal Reserve could be even more aggressive with its belt-tightening campaign.
Amid unsettling changes, the S&P 500 was unable to sustain gains after reversing a 1.6 percent drop, as a decline in Treasury yields eased pressure. Hawkish comments from Fed Bank of Atlanta president Raphael Bostic, who said “everything is at stake” for political action to combat worrying price pressures, weighed on sentiment.
The S&P 500 closed the trading session on Wednesday down 0.5%, while the Nasdaq 100 fell 0.1% and the Dow Jones Industrial Average fell 0.7%.
Wall Street saw wild changes in stock prices following the shock inflation report. Credit: NYSE
Exchange markets indicate that the likely outcome of the July Fed policy meeting is now a currency toss between a 75 basis point rise and a monstrous one percentage point increase overall.
Consumer prices were 9.1% higher last month than the previous year, accelerating from the May 8.6% inflation level, worse than economists’ expectations of 8, 8%. It was the largest rise in U.S. consumer prices since 1981, showing that a spike in inflation could still be out of reach.
“The June CPI release was an ugly impression, it can’t be avoided,” said Cliff Hodge, Cornerstone Financial’s chief investment officer. “The Fed has no choice but to follow a more aggressive path, which increases the likelihood of a recession next year.”
Traders are now betting on a 67.8 percent chance of raising the full point, compared to zero a month ago, according to CME Group.
Bank of America economists predict a “slight recession this year” in the U.S., saying spending on services is slowing and hot inflation is pushing consumers to retire. They join Wells Fargo Investment Institute and Nomura Holdings to expect a contraction in 2022. Deutsche Bank expects a contraction in mid-2023.
TINA’s multi-year market mantra (there is no alternative to stocks) faces a major threat as bond yields look more attractive. The percentage of S&P 500 members with a dividend yield above the 10-year U.S. Treasury rate has fallen to its lowest level since 2007. Payments are under pressure as companies face fears recession, historically high inflation and supply constraints.