Stocks Swoon as Treasuries Sound Recession Alarm: Markets Wrap

(Bloomberg) — Stocks dropped ahead of June’s inflation report, with the Treasury curve inversion deepening to levels last seen in 2007 amid fears that rate hikes will sink the economy into a recession.

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The S&P 500 extended losses into a third day as megacap tech sold off and energy shares joined a plunge in oil. The yield on the 10-year US note dropped as much as 12 basis points below the two-year rate. So-called inversions of the curve are a potential harbinger of an economic contraction.

Read: Biggest Stock Sell Program in a Week Hits Ahead of Equity Close

Economists say inflation continued to heat up in June, hitting a pandemic peak that will keep the Federal Reserve geared for another big hike. The consumer price index due Wednesday likely rose 8.8% from a year earlier — the largest jump since 1981, according to the median forecast in a Bloomberg survey.

“The market is showing nervousness as to what this is going to look like,” said Patrick Kaser, portfolio manager at Brandywine Global. “There’s been talk about commodity prices coming down, but we’re not really seeing that flow through yet. We’re still expecting this number to come in pretty high.”

Traders also kept a close eye on the dollar, which fluctuated after hitting the highest since the Covid-19 panic of March 2020. For now, a wall of derivatives bets is keeping the euro from reaching parity with the greenback for the first time in two decades.

The impacts of the US currency surge will also be highly scrutinized during the earnings season. PepsiCo Inc., one of the first major industry players to report second-quarter results, said demand remained robust despite inflation — but highlighted foreign-exchange translation headwinds.

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“In the current environment, dollar strength is a sign of investors’ worries about a global recession since it signals a flight to the relative safety of the world’s reserve currency,” wrote Nicholas Colas, co-founder of DataTrek Research. “Until the dollar starts to weaken, it is difficult to believe the lows are in for US equities in 2022.”

In other corporate news, American Airlines Group Inc. surged as the carrier stuck with its expectation for a jump in second-quarter sales, highlighting the strength of travel demand. Amazon.com Inc.’s Prime Day sale is luring bargain hunters looking to stock up on pantry items and cheap electronics despite a dearth of deals.

Trading revenue at the five biggest Wall Street banks likely climbed 16% to $27.8 billion in the second quarter, according to analyst estimates compiled by Bloomberg. That surge would come as a result of market swings spurred by recession fears, soaring inflation and global turmoil.

Sam Zell, the billionaire made famous by his real-estate deals, said that central bank actions to flood the market with money in recent years are coming back to bite the economy. He urged Fed Chair Jerome Powell to raise rates by as much as 75 basis points and “break the inflation mentality.”

“The Fed and other central banks are still very focused on bringing back actual inflation, but every other indicator we have of inflation is showing that this should not be our primary concern anymore, and we should be more concerned about slowing growth,” said Brian Nick, chief investment strategist at Nuveen.

Elsewhere, Bitcoin fell back below $20,000, following last week’s rally.

What to watch this week:

• Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo

• New Zealand rate decision, Wednesday

• US CPI data, Wednesday

• Federal Reserve Beige Book, Wednesday

• US PPI, jobless claims, Thursday

• China GDP, Friday

• US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday

• G-20 finance ministers, central bankers meet in Bali, from Friday

• Atlanta Fed President Raphael Bostic speaks, Friday

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Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.9% as of 4 p.m. New York time

• The Nasdaq 100 fell 1%

• The Dow Jones Industrial Average fell 0.6%

• The MSCI World index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0041

• The British pound was little changed at $1.1894

• The Japanese yen rose 0.5% to 136.80 per dollar

Bonds

• The yield on 10-year Treasuries declined three basis points to 2.96%

• Germany’s 10-year yield declined 11 basis points to 1.13%

• Britain’s 10-year yield declined 10 basis points to 2.07%

Commodities

• West Texas Intermediate crude fell 8% to $95.80 a barrel

• Gold futures fell 0.4% to $1,724 an ounce

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