Stock Market Today: Dow Drops, S&P 500 Enters Bear Market as Bond Yields Surge

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The Federal Reserve is expected to announce an interest rate hike this week. But by how much? Dreamstime

Stocks dropped on Monday, continuing declines from last week as fears loomed large over inflation and what the Federal Reserve will have to do to tame it will cause a recession. The S&P 500 could open in a bear market, defined as a 20% drop from its high.

Dow Jones Industrial Average retreated 547 points, or 1.7%, after the index lost 880 points on Friday to close at 31,392. S&P 500 futures have dropped 2.2%, while the Nasdaq Composite has slumped 2.7%. The S&P 500 and Nasdaq declined 2.9% and 3.5% on Friday, respectively.

S&P 500 futures are implying an open of about 3734 for the index, well below the 3837.29 that would signal a bear market, if it closes below that level.

Mondays tumble follows a deep selloff on Friday, catalyzed by US consumer price index (CPI) inflation data showing prices rose more than expected in May. With inflation at a multidecade highand showing few signs of peakingpressure is building on the Federal Reserve to move aggressively to tighten monetary policy.

Markets have set off on another rocky ride over inflation fears, said Steve Clayton, a fund manager at Hargreaves Lansdown. Investors are now fretting that the economic data will force the US Federal Reserves hand into pushing interest rates up, further and faster than previously forecast.

Bond yields surged. The 2-year US Treasury note, which attempts to forecast the Feds benchmark rate a couple of years from the present, moved as high as near 2.94% on Friday, the highest intraday level since late 2008. The yield on that note shot up above 3.22% on Monday, the highest since 2007, while the 10-year US Treasury yield surged to 3.24%.

The 2-year yield was as high as 2.937% today. This is the highest intraday level since Nov. 9, 2018.

The 2-year Treasury yield, which attempts to forecast the level of the federal-funds rate a couple of years from the present, jumped from 2.85% to just over 3% minutes before the inflation result hit the wires. The 2-year yield is now at a multi-year high.

The Fed is attempting to battle inflation with interest-rate increases and a reduction in its bondholdings. Having already raised rates twice this year, the Fed is expected to do so again this week after its monetary policy committee meets on Wednesday. The macro risk for markets is whether the Fed can engineer a soft landingbringing down inflation by denting economic demand without causing a recession.

Ahead of its meeting this week, investors are considering whether the Fed will raise rates by a sizable 50 basis points this weekmost increases are 25 basis points, which is one-quarter of a percentage pointor head for a supersize 75 basis-point hike.

In the wake of another shocking US CPI print on Friday, should a 75 basis-point hike not be a serious consideration? said Jim Reid, a strategist at Deutsche Bank. Without the recent Fed guidance, 75 basis points would be firmly on the table for Wednesday. This is highly unlikely this week, but our economists think they could break cover from their own guidance and leave the door open for 75 basis-points in July.

Overseas, the pan-European Stoxx 600 fell 1.8% and Tokyos Nikkei 225 ended 3% lower.

Bitcoin and other cryptocurrencies were deep into the red. Bitcointhe largest digital assettumbled 11% over the past 24 hours to below $24,400, the lowest level since late 2020.

Cryptos have largely proven to be correlated to the stock market, so the recent selloff in equities heaps downward pressure on Bitcoin and its peers. Pain in digital assets was exacerbated by crypto lending platform Celsius Network ceasing withdrawals of crypto deposits from its platform.

Write to Jack Denton at [email protected]

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