U.S. 10-Year Treasury Yield Hits 11-Year High on Aggressive Fed Expectations
Last Updated 4:15PM EST
Stock indices finished Tuesday’s trading session mixed, as the Dow Jones Industrial Average and the S&P 500 declined 0.5%, and 0.38%, respectively, while the Nasdaq 100 gained 0.21%.
Expectations of an even more aggressive Federal Reserve continue to rise, as the market is now pricing in over 90% chance of a 75 basis point rate hike in each of the next two meetings. A week ago, this probability was in the low-single digits.
In addition, the market now expects a December Fed Funds Rate of 3.75% to 4% as the most likely scenario with a 40.6% probability. This is followed by a 35.3% chance of a rate in the range of 3.5% and 3.75%.
For reference, on Thursday, investors were pricing in a 45.85% chance that the Fed Funds Rate would be 2.75% to 3% by December. On Friday, 3% to 3.25% was seen as the most probable scenario with a 37.18% chance, followed by a range of 3.25% to 3.5% at a probability of 32.57%. In addition, the most likely scenario this morning was a 3.5% to a 3.75% range.
As a result, bonds were not spared another beating today, with the U.S. 10-Year Treasury yield hitting a high of 3.497%, a level last seen in April 2011. In addition, the U.S. Two-Year Treasury yield hit a high of 3.454%, the highest since November 2007, causing a near inversion of the yield curve.
WTI Oil Gives Up Gains as Democrats Consider Taxing Oil Profits
Last Updated 3:10PM EST
Equities are in the red heading into the final stretch of Tuesday’s trading session. As of 3:10 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 0.94%, 0.87%, and 0.37%, respectively.
The energy sector, which started the day off strong with a gain of over 3%, has turned negative. In fact, the technology sector (XLK) is the best performer, while the utilities sector continues to lag, with losses of 3.5%.
WTI crude oil reversed all of its gains and turned negative despite the shortfall in OPEC production. The reason for this is that Democrats are considering legislation that taxes excess profits for oil companies. The taxes proposed are as high as 42% on profit margins greater than 10%.
This legislation would be an attempt at lowering inflation and energy costs. However, if this were to ever go into effect, it would do little to solve the problem in the long term, as inflation has been broadening out to many different categories.
Indeed, on Tuesday, the U.S. Producer Price Index (PPI), which measures the change in the price of goods sold by manufacturers, came in at 0.8% month-over-month. Although the figure was in line with expectations, it is still a high reading and unlikely to be fixed by higher taxes on oil companies.
Stocks Pull Back to Turn Red, While WTI Crude Oil Continues to Climb
Last Updated 12:15PM EST
Stock indices are mixed halfway into Tuesday’s trading session. As of 12:15 p.m. EST, the Dow Jones Industrial Average and the S&P 500 are down 0.8%, and 0.5%, respectively, while the Nasdaq 100 is up 0.1%.
Although off its highs, energy is still today’s best performing sector so far, up almost 2%. Conversely, the utilities sector (XLU) is the laggard, down over 3%.
WTI crude oil continues to see upside momentum, as it is up 0.82% and hovering around $122. This move can be attributed to the fact that OPEC oil production fell by 176,000 barrels per day during May.
Although OPEC has pledged to raise output going forward, it is likely that most countries won’t be able to actually meet the new production targets. As a result, demand for existing supply remains strong.
Conversely, the cryptocurrency market has been struggling. On Monday, crypto lending firm Celsius paused withdrawals from its platform, causing bitcoin (BTC-USD) and other coins to tumble.
To add to the negative sentiment in the space, Coinbase announced it will be cutting its workforce by 18% as it prepares for a crypto winter. Coinbase joins the growing list of companies that are seeking to reduce costs by cutting jobs as financing costs continue to increase.
Stocks Rebound Following Monday’s Decline
Last Updated 10:00AM EST
Stocks are slightly green after the first 30 minutes of trading, following Monday’s big sell-off. As of 10:00 a.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 0.7%, 0.55%, and 0.75%, respectively.
The energy sector (XLE) was hit the hardest on Monday, as it fell 5.2%. However, it is having a strong start today as it is up almost 3%. Conversely, the real estate sector (XLRE) is the laggard so far, down 0.2%.
The market is trying to anticipate the Federal Reserve’s next move following last Friday’s inflation report. Given that the CPI figure came in higher than expected, investors are now expecting the central bank to be even more aggressive with its rate hikes. Thus, it is trying to price assets accordingly to this new possibility.
As of this writing, the market is expecting a 96.1% possibility of a 75 basis point rate hike, even though the Federal Reserve has been calling for 50 basis points. This is up significantly from the 3.1% chance from a week ago.
In addition, the market now expects a December Fed funds rate of 3.5% to 3.75% as the most likely scenario with a 38.4% probability. This is followed by a 36.9% chance of a rate in the range of 3.75% and 4%.
For reference, on Thursday, investors were pricing in a 45.85% chance that the Fed funds rate would be 2.75% to 3% by December. On Friday, 3% to 3.25% was seen as the most probable scenario with a 37.18% chance, followed by a range of 3.25% to 3.5% at a probability of 32.57%.
Pre-Market Update
Stock futures moved up after an arduous day of sell-offs which finally pushed the S&P 500 into the official bear market territory.
Futures on the Dow Jones Industrial Average (DJIA) gained 0.38%, while those on the S&P 500 (SPX) climbed 0.51%, as of 5:19 a.m. EST, Tuesday. Meanwhile, the Nasdaq 100 (NDX) futures added 0.75%.
The positive movement comes despite there being insignificant positive news in the market. After May’s consumer price index revealed a new 40-year-high inflation of 8.6%, the Wall Street Journal reported that experts are expecting a 75 basis point increase in interest rates this month, during the Federal Reserve’s policy announcement on Wednesday. This is higher than the 50 basis point hike expected earlier.
The Fed’s two rate hikes this year did little or nothing to bring inflation down, which shook investors’ confidence in the market. Moreover, a decrease in the economic outlook by the World Bank added fuel to the fire. Importantly, May’s CPI data solidifies the fact that inflation hasn’t peaked yet. In fact, the inflation has gone further away from the Fed’s goal to bring it down to 2%.
These are the factors that are reportedly being taken into consideration while contemplating a more aggressive stance that comes at the cost of a recession.
Monday’s regular trading saw panicked exits which led the Dow to close 2.79% lower, sending it tumbling 17% off its most recent high. The S&P 500, which was dwindling above the bear zone for a few weeks, finally let go, ending Monday 3.88% lower and falling 21% below its record high set in January. On the other hand, the Nasdaq 100, which has already been in bear market territory for some time, fell 4.6% at the closing bell.
Meanwhile on Monday, the 10-year Treasury yield advanced 24 basis points to reach 3.39%, its biggest climb since March 2020. This came after the more aggressive policy shifts that led to severe losses in the stock market.
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