8/17: Stocks drop as Fed rate bets increase on inflation concerns

Stocks drop as Fed rate bets increase on inflation concerns
Stocks drop as Fed rate bets increase on inflation concerns

As investors worried that improving consumer sentiment, retail spending, and job growth will continue to fuel domestic inflation and trigger more Fed rate hikes, U.S. equity futures dropped Wednesday, Treasury bond yields jumped, and the dollar extended gains against its global peers.

Yesterday, the Dow surpassed 34,000 points for the first time since May after Walmart (WMT) and Home Depot (HD) reported better-than-expected second quarter earnings.

Gains, which come after a blowout July jobs report that included 528,000 new hires and 5.2% wage growth, also raise concerns that inflation may accelerate again.

According to CME Group’s FedWatch, the odds of another jumbo Fed rate hike in September rose to around 48.5% overnight following an overnight rate hike by the Bank of New Zealand, its fourth consecutive hike, as well as a searing 10.1% July inflation reading in Britain, the highest in forty years.

In overnight trading, benchmark 2-year Treasury note yields were 5 basis points higher at 3.308%, while 10-year notes were 2.868%.

Fed chairman Jerome Powell and his colleagues are likely to focus on a wealth of data before making their next rate decision in September, according to the minutes of the July policy meeting.

According to Powell, the July minutes will detail the thinking behind the Fed’s second consecutive 75 basis point rate hike, which brought the benchmark rate to a range between 2.25% and 2.5%. Powell said the Fed would not hesitate to hike the rate again if the Open Markets Committee deemed it necessary.

Despite the Atlanta Fed’s GDPNow forecasting tool indicating 2.5% growth, the U.S. Treasury curve remains steeply inverted — a condition that has preceded nearly every recession for the past 25 years.

It was marked 0.03% higher at 106.608, compared with a basket of six global currency peers.

Prior to the start of trading Wednesday, the Commerce Department will release official July retail sales data that will likely illustrate the impact of low domestic gas prices.

The overall tally of retail sales fell from June’s $682.8 billion peak amid the ongoing slump in gasoline prices, economists say. It is estimated that core retail sales rose by 0.8%, excluding volatile components like food and energy.

Ahead of weekly Energy Department data on domestic crude stocks at 10:30 am Eastern time, oil prices extended their recent slide, pulling U.S. crude close to six-month lows.

WTI crude futures for September delivery were marked 22 cents lower at $86.44 per barrel while Brent contracts for October, the global benchmark, fell 36 cents to $91.98 per barrel.

As well, European stocks fell in Frankfurt trading by 0.46 percent, as the Stoxx 600 index fell by 0.46 percent, while in Asia overnight, the Nikkei 225 index gained 1.23% to retake the 27,000 point mark for the first time in seven months as well as the region-wide MCSI ex-Japan index gained 0.16%.

Futures on the S&P 500 indicate a 32 point rise, while those on the Dow Jones Industrial Average predict a retreat of 182 points. The Nasdaq futures are indicating a 105 point decline.

 

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