US stocks collapsed back into bear market territory Monday as investors bet that the record high inflation numbers for May would mean an aggressive Federal Reserve interest rate hike program is coming down the line.
By the close, the Nasdaq was down 4.7%, ending at 10,809.23, the lowest since September 2020. The S&P dropped back to 3,749.81, putting it once again more than 20% below its record high in January, making this officially a bear market.
The benchmark 10-year Treasury rose 3.34%, the highest level since 2011, as Treasuries overall rose all along the curve.
Crypto slid as well, a slide which extended into stocks, where Coinbase and Microstrategy Incorporated both came under heavy selling pressures.
Adding to the concerns is that the Fed’s next policy-setting meeting will come this week, with a rate decision set for Wednesday. Investors had widely assumed the Fed would walk away with an anticipated half point interest rate hike, one of two to come in the next two meetings. However with the inflation numbers last week beating all expectations and hitting a 40 year high of 8.6%, it is now assumed this will begin a much more aggressive policy of monetary tightening.
After Friday’s inflation report, investor opinions on where the Fed would fall on interest rates rapidly shifted, as Fed funds futures, a measure of investor sentiment, rapidly began to show increased bets on a 0.75% hike. Presently investors appear to have priced in a 75% chance of a 0.5% rate hike, and a 25% chance of a 0.75% hike. last week, prior to the inflation report, investors were pricing in a 90% chance of a 0.5% rate hike.
Michael Pearce, senior U.S. economist for Capital Economics, wrote in a note, “There is very little in the details of [Friday’s CPI] report to suggest that inflationary pressures are easing. 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.”
Raising rates so aggressively is guaranteed to slow the economy and reduce the ability of credit to fuel buying and hiring. However according to the consumer sentiment numbers, with one survey showing it at the lowest level since the 1970’s, consumers are already reducing buying due to the rapid increases in prices being produced by the rampant inflation. Given all of the uncertainty, some are hoping the Fed remains cautious, and simply retains the predicted half point increase in rates, and waits to see what that will bring.