Stocks started the week off with sharp losses on Monday and, once again, fear of rising interest rates was to blame. Specifically, there’s been increased speculation that the Federal Reserve may well ratchet up the pace at which it raises its overnight lending rate, to three-quarters of a percentage point at a time, possibly as early as this week. (The market had previously been anticipating 50-basis-point increases at its June and July meetings.) Expectations for larger increases were fanned by last week’s Consumer Price Index report for May, which showed inflation (up 8.6% year over year) picking up, rather than decelerating. The Fed’s rate increases then filter their way throughout the credit markets, raising rates for mortgages, car loans, etc., making purchases financed by loans more burdensome, thus slowing down demand.
Not surprisingly, the yield on the 10-year Treasury jumped 21 basis points, to 3.37%, its highest level in over a decade. (A basis point is one-hundredth of one percent.) By comparison, it started the year around 1.5%. All things being equal, rising yields on bonds and other fixed-income securities make stocks less attractive to own.
When all the dust had settled, the Dow Jones Industrials lost 2.8%, while the S&P 500 had dropped 3.9%, leaving it down more than 21% since it peaked in January. This places the widely followed index in bear market territory, as defined by a drop of 20% or more from a prior high. The tech-heavy NASDAQ fared even worse, sliding 4.7%, marking a loss of one-third of its market value since its peak in November. By the numbers, the Dow shed 876 points, the S&P 500 moved down 151 points, and the NASDAQ lost 530 points. All of the major market sectors ended the day well into the red, with the largest declines suffered by energy (-5.1%), consumer discretionary (-4.7%), and utilities (-4.6%). Meanwhile, consumer staples fared the best of the lot, down only 2.2%.
Looking ahead to the new day, U.S. stock futures are suggesting the major indexes will start today’s session with a bounce to the upside. Elsewhere, Asian markets mostly lost ground overnight, while stocks in Europe are trading in the red. Meanwhile, oil futures are up 1.3%, to around $122.50 a barrel.
On the economic front, this morning the Bureau of Labor Statistics reported that the Producer Price Index showed a 10.8% year-over-year increase for May, just below the consensus estimate. The index was up 0.8% on a sequential basis, versus a 0.4% increase in April. These numbers confirmed that inflation is not yet under control, making it increasingly likely the Federal Reserve would pick up the pace. For the rest of this week, retail sales for May come out Wednesday morning, with a modest deceleration expected there. Also, the Home Builder’s Index for June is due that day, and a slight step back is also expected for that report. However, investors will be far more interested in what the Fed announces on Wednesday as it wraps up its two-day meeting. Chairman Jerome Powell’s statement after the meeting will be carefully scrutinized for any clues as to what the Fed might do next. The week continues with reports on initial and continuing jobless claims, building permits, and housing starts on Thursday, followed by the latest on industrial production, capacity utilization, and the leading economic indicators on Friday.
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
