U.S. stock futures rose Monday night, ahead of the final trading week of 2022.
Dow Jones Industrial Average futures
YM00,
+0.44%
gained more than 150 points, or 0.5%, as of 11 p.m. Eastern. S&P 500 futures
ES00,
+0.59%
and Nasdaq-100 futures
NQ00,
+0.71%
were also logging solid gains, indicating positive market moves when regular trading resumes Tuesday from the three-day Christmas holiday.
Oil prices rose
CL.1,
+0.85%,
as the U.S. Dollar Index
DXY,
-0.30%
slipped.
Last week, the Dow gained nearly 1%, while the S&P 500 and Nasdaq fell for a third straight week.
See more: What to expect for the stock market in 2023 after the biggest decline since the financial crisis
On Friday, the Dow Jones Industrial Average
DJIA,
+0.53%
rose 176.44 points, or 0.5%, to close at 33,203.93. The S&P 500
SPX,
+0.59%
gained 22.43 points, or 0.6%, finishing at 3,844.82, for a weekly decline of 0.2%. The Nasdaq Composite
COMP,
+0.21%
closed at 10,497.86, up 6.85 points, or 0.4%. For the week, the Nasdaq fell 1.9%.
Friday marked the start of the so-called Santa Claus rally period — the final five trading days of the calendar year and the first two trading days of the new year. That stretch has, on average, produced gains for stocks, but failure to do so is often read as a negative indicator.
Read more: How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter
The Federal Reserve isn’t trying to slam the stock market as it rapidly raises interest rates in its bid to slow inflation still running red hot — but investors need to be prepared for more pain and volatility because policy makers aren’t going to be cowed by a deepening selloff, investors and strategists said.
“I don’t think they’re necessarily trying to drive inflation down by destroying stock prices or bond prices, but it is having that effect.” said Tim Courtney, chief investment officer at Exencial Wealth Advisors, in an interview.
U.S. stocks fell sharply in the past week after hopes for a pronounced cooling in inflation were dashed by a hotter-than-expected August inflation reading. The data cemented expectations among fed-funds futures traders for a rate hike of at least 75 basis points when the Fed concludes its policy meeting on Sept. 21, with some traders and analysts looking for an increase of 100 basis points, or a full percentage point.
Preview: The Fed is ready to tell us how much ‘pain’ the economy will suffer. It still won’t hint at recession though.
The Dow Jones Industrial Average
DJIA,
-0.45%
logged a 4.1% weekly fall, while the S&P 500
SPX,
-0.72%
dropped 4.8% and the Nasdaq Composite
COMP,
-0.90%
suffered a 5.5% decline. The S&P 500 ended Friday below the 3,900 level viewed as an important area of technical support, with some chart watchers eyeing the potential for a test of the large-cap benchmark’s 2022 low at 3,666.77 set on June 16.
See: Stock-market bears seen keeping upper hand as S&P 500 drops below 3,900
A profit warning from global shipping giant and economic bellwether FedEx Corp.
FDX,
-21.40%
further stoked recession fears, contributing to stock-market losses on Friday.
Read: Why FedEx’s stock plunge is so bad for the whole stock market
Treasurys also fell, with yield on the 2-year Treasury note
TMUBMUSD02Y,
3.867%
soaring to a nearly 15-year high above 3.85% on expectations the Fed will continue pushing rates higher in coming months. Yields rise as prices fall.
Investors are operating in an environment where the central bank’s need to rein in stubborn inflation is widely seen having eliminated the notion of a figurative “Fed put” on the stock market.
The concept of a Fed put has been around since at least the October 1987 stock-market crash prompted the Alan Greenspan-led central bank to lower interest rates. An actual put option is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a set level, known as the strike price, serving as an insurance policy against a market decline.
Some economists and analysts have even suggested the Fed should welcome or even aim for market losses, which could serve to tighten financial conditions as investors scale back spending.
Related: Do higher stock prices make it harder for the Fed to fight inflation? The short answer is ‘yes’
William Dudley, the former president of the New York Fed, argued earlier this year that the central bank won’t get a handle on inflation that’s running near a 40-year high unless they make investors suffer. “It’s hard to know how much the Federal Reserve will need to do to get inflation under control,” wrote Dudley in a Bloomberg column in April. “But one thing is certain: to be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.”
Some market participants aren’t convinced. Aoifinn Devitt, chief investment officer at Moneta,said the Fed likely sees stock-market volatility as a byproduct of its efforts to tighten monetary policy, not an objective.
“They recognize that stocks can be collateral damage in a tightening cycle,” but that doesn’t mean that stocks “have to collapse,” Devitt said.
The Fed, however, is prepared to tolerate seeing markets decline and the economy slow and even tip into recession as it focuses on taming inflation, she said.
Recent: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech
The Federal Reserve held the fed funds target rate at a range of 0% to 0.25% between 2008 and 2015, as it dealt with the financial crisis and its aftermath. The Fed also cut rates to near zero again in March 2020 in response to the COVID-19 pandemic. With a rock-bottom interest rate, the Dow
DJIA,
-0.45%
skyrocketed over 40%, while the large-cap index S&P 500
SPX,
-0.72%
jumped over 60% between March 2020 and December 2021, according to Dow Jones Market Data.
Investors got used to “the tailwind for over a decade with falling interest rates” while looking for the Fed to step in with its “put” should the going get rocky, said Courtney at Exencial Wealth Advisors.
“I think (now) the Fed message is ‘you’re not gonna get this tailwind anymore’,” Courtney told MarketWatch on Thursday. “I think markets can grow, but they’re gonna have to grow on their own because the markets are like a greenhouse where the temperatures have to be kept at a certain level all day and all night, and I think that’s the message that markets can and should grow on their own without the greenhouse effect.”
See: Opinion: The stock market’s trend is relentlessly bearish, especially after this week’s big daily declines
Meanwhile, the Fed’s aggressive stance means investors should be prepared for what may be a “few more daily stabs downward” that could eventually prove to be a “final big flush,” said Liz Young, head of investment strategy at SoFi, in a Thursday note.
“This may sound odd, but if that happens swiftly, meaning within the next couple months, that actually becomes the bull case in my view,” she said. “It could be a quick and painful drop, resulting in a renewed move higher later in the year that’s more durable, as inflation falls more notably.”
European energy prices surged after Russia shut down natural-gas flows through a major pipeline, threatening to add to economic woes for businesses and households across the continent.
Natural-gas futures in northwest Europe, which reflect the cost of fuel in the wholesale market, jumped more than 30% in early trading Monday. They remain below the all-time high recorded in late August.
State-controlled Gazprom PJSC extended a halt to flows through Nord Stream late Friday. Moscow blamed the suspension on technical problems. European governments described it as an economic attack in retaliation for their support of Ukraine.
Over the weekend, governments in Sweden and Finland offered billions of dollars of guarantees to utilities to prevent a meltdown in energy trading. Officials fear the loss of imports through Nord Stream could lead to a further leap in power prices and saddle utilities with cash payments to energy trading exchanges that they may struggle to meet. A wave of failed payments could undermine financial stability, officials said.
“This has had the ingredients for a kind of a Lehman Brothers of energy industry,” Finland’s Economic Affairs Minister
Mika Lintilä
said Sunday.
Swedish and Finnish government officials worked through the weekend on programs designed to make sure electricity producers can meet exchange payments known as margin calls. Stockholm is home to
Nasdaq
Clearing AB, a subsidiary of
Nasdaq Inc.
that processes most derivative trades in the Nordic power market, which includes Finland and the Baltic countries.
Under the Swedish plan, the government would provide guarantees to eligible companies, which could then use the guarantees to borrow from banks and pay the exchange clearinghouse. The Swedish government would have license to extend up to 250 billion kroner, or $23 billion, in guarantees, said a finance-ministry official.
The Finnish government plans to offer 10 billion euros, or $10 billion, in guarantees.
Nasdaq Clearing spokesman David Augustsson said the measures would help the power market act in an orderly manner Monday. “This is an extreme time of uncertainty and the addition of government liquidity guarantees will add an extra layer of stability,” he said.
Last week, European Energy Exchange AG, the main European venue for power trading outside the Nordics, said Germany and other European Union members should help companies fund margin payments. A spokesperson didn’t respond to requests for comment on Sunday.
Russia’s state-controlled Gazprom PJSC extended a halt to flows through the Nord Stream pipeline late Friday.
Photo:
HANNIBAL HANSCHKE/REUTERS
Armed with the guarantees, utilities and other energy companies would find banks more willing to lend money to cover margin payments, the Swedish official said. The Swedish parliament will vote on the program Monday and it would take effect the same day if approved. One concern is that the clearinghouse itself might default, the official said.
“This threatens our financial stability. If we don’t act soon it could lead to serious disruptions in the Nordics and Baltics,“ Swedish Prime Minister Magdalena Andersson said Saturday at a news conference outlining the plan. “In the worst-case scenario we could fall into a financial crisis,” Ms. Andersson added.
When utilities agree to deliver gas or power, they lock in prices by selling futures contracts. Exchanges charge one payment, known as initial margin, when trades are placed to collect collateral. They then call for or return money each day depending on whether the position gains or loses value.
As prices rise, utilities’ short positions shed value and the companies pay the exchange. They recoup the money when they deliver gas or power, but the difference in timing has led to massive outflows of cash that some firms have struggled to fund. At times a vicious cycle has emerged in which extreme price moves boost margin calls, prompting companies to bail out of trades and sparking more volatility.
“No one’s got the money to pay to trade,” said Justin Colley, an analyst at Argus Media. “Putting up these margin payments every day is just causing problems for everyone—not just the small companies, but also the big companies, the national utilities.”
The guarantees could add to the mounting cost for governments of aiding households and businesses through a historic rise in energy prices largely caused by Moscow’s move to cut gas exports. On Sunday, Germany unveiled its third energy relief package this year, worth €65 billion, to shield consumers.
European energy ministers are due to hold an emergency meeting Friday to discuss options for dealing with skyrocketing electricity prices, such as a possible price cap for non-gas sources of power generation.
They will also consider energy companies’ cash concerns. The Czech Republic, which holds the EU’s rotating presidency, is expected to put forward several options for ministers to consider, including the temporary suspension of power derivatives markets and a European credit line for energy market participants, an EU diplomat said.
European gas and power prices have been wildly volatile. They shot to records in late August before slumping last week after the European Union said it would change the structure of the power market to bring down prices for consumers and businesses. Nordic and Baltic prices have been especially turbulent, in part because a drought curbed hydropower generation in Norway.
Tom Marzec-Manser, gas analyst at ICIS, said he expected gas and electricity prices to rise again Monday in response to Gazprom’s shut-off. “Meeting demand, whatever that might turn out to be, is going to be that much harder,” he said.
To a certain extent, energy markets were already girding for Russia to completely cut off gas supplies. Gazprom had reduced Nord Stream flows to 20% capacity in the weeks before the shutdown.
Some factors could act to bring prices down after an initial leap, traders and analysts said—including the action taken by Nordic governments. Weather forecasts suggest there might be greater power generation from wind farms, reducing demand for gas.
Uniper,
one of the two biggest buyers of Russian gas in Europe until recently, said last week it had fully drawn down a €9 billion credit line from German state lender KfW. The company said it had asked to borrow an extra €4 billion to make margin payments and buy gas to make up for lost deliveries from Gazprom.
U.S. stock futures fell and Treasury yields jumped to start the week, as investors remained rattled by the Federal Reserve’s resolve to keep fighting inflation even if it causes some economic pain.
Futures tied to the S&P 500 dropped 0.8%, putting the benchmark index on pace to extend its 3.4% loss on Friday. Contracts for the Dow Jones Industrial Average lost 0.8%, while those tied to the tech-focused Nasdaq-100 sank 1%.
Monday’s declines before the opening suggest U.S. stocks will likely see another turbulent day of trading, as traders assess Fed Chairman
Jerome Powell’s
comments from last week. Speaking Friday in Jackson Hole, Mr. Powell said the U.S. central bank must continue raising interest rates and keep them at an elevated level, until it is confident inflation is under control.
The comments unsettled investors, many of whom had begun to wager that this year’s historically large rate increases were in the rearview mirror. Many had expected that, starting in September, the Fed would slow the magnitude of its interest-rate increases, until eventually cutting rates next year.
Friday’s comments reshuffled those expectations. On Monday, federal-funds futures, used by traders to place wagers on the course of interest rates, showed a nearly 65% chance that the central bank would lift interest rates by 0.75 percentage point for a third time in a row in September. That is up from 28% a month ago, according to CME Group data.
“The market kind of got ahead of itself over the last three, four weeks or so…in terms of pricing in a possible Fed pivot to a more dovish stance,” said Clara Cheong, a global market strategist at J.P. Morgan Asset Management.
Investors’ growing jitters stand to further unwind a rally that had sent stocks climbing from their 2022 lows reached in June. Already, all three major U.S. indexes have seen their August gains wiped out. Many investors are betting on further pain ahead, with net short positions against S&P 500 futures recently reaching levels not seen in two years.
In premarket trading Monday, many of the S&P 500’s biggest losers were companies that had risen sharply amid the stock market’s summer rebound.
Tesla
fell 1.7%, while
PayPal Holdings
lost 1.6%. Economically sensitive stocks also took a beating before the opening bell, with
Las Vegas Sands,
Alaska Air Group
and Royal Caribbean all falling 1.8% or more.
“It’s game-changing. We’re coming from a world where people were looking for a Fed pivot, but they got a pivot in the wrong direction,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers, who noted he began lowering his exposure to stocks last week as volatility rose. “We are not defensive yet, but our exposure remains cautious.”
Investors’ risk-off sentiment rippled around the globe and across asset classes. The pan-continental Stoxx Europe 600 dropped 0.9%, following indexes in Asia lower. Bitcoin fell 3.5% from its 5 p.m. ET level on Friday to about $19,942 according to CoinDesk.
U.S. Treasury yields climbed further as a selloff in government bonds gathered pace. The yield on the two-year Treasury note, which is more sensitive to near-term Fed policy expectations, rose to 3.435%, from 3.391% Friday.
The 10-year Treasury yield rose to 3.091%, from 3.034%. High U.S. short-term yields relative to long-term yields—also known as an inverted yield curve—have in the past signaled a significant risk of a recession.
Oil prices rose, with Brent crude gaining 1.2% to $100.24 a barrel, buoyed by expectations of supply curbs.
In Asia, major indexes ended mostly lower. Japan’s Nikkei 225 fell 2.7%, South Korea’s Kospi dropped 2.2% and Hong Kong’s Hang Seng lost 0.7%. The Shanghai Composite was a rare bright spot, rising 0.1%.
Write to Caitlin McCabe at caitlin.mccabe@wsj.com and Dave Sebastian at dave.sebastian@wsj.com
All eyes on a television broadcast of Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium on Friday.
WASHINGTON—Leaders of a Senate committee are pitching legislation that would assign oversight of the two largest cryptocurrencies, bitcoin and ether, to the federal agency that regulates milk futures and interest-rate swaps.
Senate Agriculture Committee Chairwoman Debbie Stabenow (D., Mich.) and top-ranking Republican John Boozman of Arkansas unveiled a plan Wednesday that would empower the Commodity Futures Trading Commission to regulate spot markets for digital commodities, a newly created asset class. Currently the CFTC has authority to police derivatives, such as futures and swaps, rather than underlying commodities.
The bill marks the latest salvo in an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto. Thirteen years after bitcoin was created, cryptocurrencies remain largely unregulated by the federal government, leaving investors without key protections from fraud and market manipulation.
The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers. The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.
“‘When there’s a topic as hot as crypto, everybody wants a seat at the table.’”
“When there’s a topic as hot as crypto, everybody wants a seat at the table,” said
Aaron Klein,
a senior fellow at Brookings Institution who focuses on financial regulation. “The question is, are we going to have regulatory turf paralysis?”
In practical terms, for federal agencies such as the CFTC, Securities and Exchange Commission, and Federal Reserve, adding crypto to their remit would bring bigger budgets, greater influence and more job opportunities for officials who leave public service. For members of the congressional committees that oversee such regulators, a new industry in their sandbox would create another stream of lobbyists and campaign donations.
“We need to treat this seriously and take our responsibilities seriously for protecting consumers,” Ms. Stabenow said in a virtual press conference alongside Mr. Boozman.
Washington has introduced a flurry of bills in recent months to draw jurisdictional lines. Sens.
Cynthia Lummis
(R., Wyo.) and
Kirsten Gillibrand
(D., N.Y.) unveiled a proposal in June that would create exemptions for cryptocurrencies in securities laws, banking statutes and tax code. In July, leaders of the House Financial Services Committee said they were working on a bill to grant the Federal Reserve a greater role in regulating some stablecoins, crypto tokens pegged against the dollar and other official currencies.
When cryptocurrency lending platform Celsius froze user accounts amid a plunge in valuations, it sent ripples across the industry and raised questions about what happens to user assets if a crypto platform files for bankruptcy. WSJ’s Vicky Ge Huang explains. Photo illustration: Jordan Kranse
Agencies also are seeking to claim territory. CFTC Chairman
Rostin Behnam,
a former staffer to Ms. Stabenow, said last week his agency is “ready and well situated” to oversee spot markets for some cryptocurrencies. He has worked with his former boss for months to help craft legislation that would authorize the CFTC to do so, people familiar with the matter say.
Meanwhile, SEC Chairman
Gary Gensler
has repeatedly demanded that cryptocurrency-trading platforms such as
Coinbase Global Inc.
register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.
“Four years ago when I started this job, there were some people that just thought this thing was all going to blow up and go away, that this was sort of a passing fad,” said Kristin Smith, executive director of the Blockchain Association, a trade group representing crypto firms.
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Now, she said, “We’ve got all these regulators suddenly vying for control.”
After the SEC alleged in an insider-trading case in July that at least seven cryptocurrencies listed on Coinbase should have been registered as securities, Republican CFTC Commissioner
Caroline Pham
accused the SEC of “regulation by enforcement.”
“The SEC is not working together with the CFTC,” Ms. Pham said in an interview. “They go out unilaterally to try to establish precedent that’s going to dramatically reshape the landscape as to what’s a security and what’s a commodity.”
Ms. Pham has posted photos to her
Twitter
account of herself posing alongside crypto lobbyists and executives including
Sam Bankman-Fried,
the billionaire founder of trading platform FTX.
Ms. Pham said that crypto is one of the areas she is focused on, and, “I take pictures with everybody. Like, literally, everybody.”
At the heart of the turf war are questions about how cryptocurrencies fit into the definition of a security, the legal classification that includes stocks and bonds.
Coinbase and other firms have lobbied Congress to create a new category for digital commodities and empower the CFTC to regulate it.
Photo:
Shannon Stapleton/REUTERS
A 1946 Supreme Court case created a test that focuses on whether investors buy an asset in hopes of profiting from the efforts of other people. If so, the issuer is required to register with the SEC and publicly disclose any information that may be material to the security’s price.
Even though investors in bitcoin and ether rely on a network of users and programmers to validate transactions and perform software updates, cryptocurrency enthusiasts insist those groups are too decentralized for the assets to be regulated like securities. Instead, they argue, the assets should be considered commodities, which have a broader definition and no full-time regulator.
Firms such as Coinbase, FTX and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category for digital commodities and empower the CFTC to regulate it. The agency has roughly one-sixth the head count of the SEC, and its rules are seen by the industry as easier to comply with than securities laws.
“When you ask the people that are in the industry…almost all feel like the regulator should be primarily the CFTC,” Mr. Boozman said. “The fact that they’re fairly united on that makes it easier on members.”
Crypto skeptics worry that creating a new legal concept for cryptocurrencies could create an alternative to securities registration for a wider variety of assets.
“People who are taking action that could undermine our securities law are playing with fire,” said Dennis Kelleher, president of investor-advocacy group Better Markets. “You may love or hate the SEC, but transparent disclosure, clear rules…and enforcement is what builds trust and confidence in our markets.”
The legislation being unveiled Wednesday would seek to exclude securities from the definition of digital commodities, making it narrower in scope than that of other crypto-related bills floated in recent months, such as the Lummis-Gillibrand proposal.
Ms. Stabenow said she expects the Agriculture Committee to hold a hearing on the bill as early as September.
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The bill would require any entity acting as a digital commodity platform—including crypto exchanges such as Coinbase and FTX—to register with the CFTC as trading facilities, dealers or brokers. The exchanges would have to monitor trading, protect investors from abuse and only offer assets that are resistant to market manipulation, among other requirements.
Platforms also would be obliged to disclose some information about the assets they list, such as operating structure and conflicts of interest. Such information would likely fall short of the extensive disclosures required by the SEC for securities.
The derivatives markets the CFTC currently oversees are dominated by professional investors, such as banks and hedge funds. Crypto markets, by contrast, draw legions of small investors who are more vulnerable to scams.
If the agency wins jurisdiction over bitcoin and ether, the CFTC would have to write rules from scratch to protect such investors.
“How robust would they be and how long would that take?” asked Tyler Gellasch, executive director of the Healthy Markets Association, an investor trade group.
Growing signs that price pressures are easing suggest that June’s distressingly high 9.1% increase in consumer prices will probably be the peak. But even if inflation indeed comes down, economists see a slow pace of decline.
Ed Hyman,
chairman of Evercore ISI, pointed to many indicators that 9.1% might have been the top. Gasoline prices have fallen around 10% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago, according to Xeneta, a Norway-based transportation-data and procurement firm.
Easing price pressures and improvements in backlogs and supplier delivery times in business surveys suggest that supply-chain snarls are unraveling. Mr. Hyman noted that money-supply growth has slowed sharply, evidence that monetary tightening is starting to bite.
Inflation expectations also fell recently—an upbeat signal for the Fed, which believes that such expectations influence wage and price-setting behavior and thus actual inflation. The University of Michigan consumer-sentiment survey showed that longer-term inflation expectations slipped from June’s 3.1% reading to 2.8% in late June and early July, matching the average rate during the 20 years before the pandemic.
Bond investors are less worried about inflation, based on the “break-even inflation rate”—the difference between the yield on regular five-year Treasury bonds and on inflation-indexed bonds—which has dropped to 2.67% from an all-time high of 3.59% hit in late March.
Inflation-based derivatives and bonds are projecting that the annual increase in the CPI will fall to 2.3% in just a year, around the Fed’s 2% target (which uses a different price index), according to the Intercontinental Exchange.
Roberto Perli,
economist at Piper Sandler, calls such an outcome “optimistic but not totally implausible.” From February through early June, investors thought inflation would still be between 4% and 5% in a year.
“It’s a step in the right direction, but ultimately, even if June is the peak, we’re still looking at an environment where inflation is too hot,” said
Sarah House,
senior economist at Wells Fargo, who expects fourth-quarter inflation between 7.5% and 7.8%. “So peak or not, inflation is going to remain painful through the end of the year.”
And the slower it is to ebb, the larger the likelihood of a damaging downturn, said
Brett Ryan,
senior U.S. economist at Deutsche Bank.
Core inflation, which strips out volatile food and energy prices and is considered a better measure of inflation trends, was 5.9% in June, down from a peak of 6.5% in March. But Ms. House and Mr. Ryan both expect core inflation to revive and peak sometime around September, as strong price growth for housing and other services combines with low base comparisons in the 12-month calculation.
“The more persistent inflation pressures, the higher the Federal Reserve needs [interest rates] to go to address them,” said Mr. Ryan. “That argues for a larger recession risk.”
Fed Chairman
Jerome Powell
has said the central bank wants to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases.
“The moment of truth comes at the end of this year,” said Mr. Hyman. “If the Fed keeps on raising rates, then they’d invert the yield curve. I think that would increase the odds of recession enormously. It would probably also lower inflation, although it also seems to already be slowing, and will probably be even slower by then.”
Aichi Amemiya,
U.S. economist at Nomura, said that though it is too early to call it, his forecast sees June as the peak for the annual measure of overall inflation. However, the month-over-month change in core CPI will be key to watch in coming months, he said. If it slows from June’s pace of 0.7% to 0.3% on a sustained basis by year-end, he expects the Fed to start planning to ease up on rate increases. That, however, will be hard to achieve, said Mr. Amemiya, “which means the Fed will likely continue tightening even after the economy enters a recession.”
Around the turn of the year, economists were generally confident that inflation would peak in early 2022, as energy prices stabilized and supply-chain pressures eased. Then Russia invaded Ukraine, and energy prices soared. Buzz about “the peak” crescendoed again when inflation slid to an 8.3% annual rate in April, from 8.5% in March. But gasoline prices flared up again, and gains in food and rent picked up, too.
There is plenty of potential for another reversal in coming months, said Ms. House.
“When we look at ongoing core inflation pressures, it wouldn’t take much in the way of a commodities price shock for us to reach another high,” she said, adding that possible examples include an escalation of the Russia-Ukraine conflict, a hurricane that shuts down an oil refinery, or an outage at a key semiconductor or auto plant. “We all hope we’re at the peak. But hope is not really an inflation strategy right now.”
U.S. stock indexes pushed higher after a wobbly start Wednesday, leaving Wall Street potentially on to gain ground after back-to-back losses, as investors tune in to remarks by central bankers while fretting that soaring inflation is damaging the world’s biggest economy.
How are stock indexes trading?
The Dow Jones Industrial Average
DJIA,
+0.12%
was up 196 points, or 0.6%, at 31,143.
The S&P 500
SPX,
-0.23%
traded up 15 points, or 0.4%, at 3,836.
The Nasdaq Composite
COMP,
-0.43%
gained 42 points, or 0.4%, to 11,223.
On Tuesday, the Dow fell 491.27 points, or 1.6%. The S&P 500 fell 2% and the Nasdaq Composite dropped 3%. All three booked their worst daily percentage declines since June 16, according to Dow Jones Market Data.
What’s driving markets?
Federal Reserve Chair Jerome Powell said Wednesday at a European Central Bank forum on central banking that he sees a path back to 2% inflation while sustaining strong labor market, but warned there was “no guarantee that we can do that.”
Investors were also listening to remarks from European Central Bank President Christine Lagarde, Bank of England Gov. Andrew Bailey and Augustin Carstens, head of Bank for International Settlements, to speak at speak at the same conference.
On U.S. economic data, the first-quarter GDP was revised to show an 1.6% decline, compared with the prior 1.5% drop.
Equities were limping toward the end of a miserable first half of the year. The S&P 500 is down 19.6% so far in 2022, hit by concerns that inflation rates at multidecade highs are badly damaging household sentiment and that the Federal Reserve’s response to surging prices may tip the economy into recession.
Read: What’s next for the stock market after the worst 1st half since 1970? Here’s the history.
On Tuesday, the Conference Board’s consumer-confidence index dropped in June to a 16-month low of 98.7, with consumers’ outlook on the state of the economy at the most cautious in nearly 10 years. The news helped turn early gains for Wall Steet into heavy losses, with the Nasdaq Composite shedding 3%, leaving the tech-heavy index nursing a loss of 28% for the year to date.
“Last week, U.S. equity markets rallied on the back of the arcane logic that a U.S. recession would mean a lower terminal Fed funds rates and thus, was bullish for stocks… That premise was boosted by weak Michigan Consumer Sentiment data,” said Jeffrey Halley, senior market analyst at OANDA, in a note to clients.
See: Wall Street’s favorite stock sector has potential upside of 43% as we enter the second half of 2022
On Tuesday, “even weaker U.S. Conference Board Consumer Confidence data provoked the opposite reaction, with U.S. stocks plummeting,” he added.
Wall Steet’s dive left Asian and European bourses floundering. Hong Kong’s Hang Seng
HSI,
-1.88%
fell 2% and the Nikkei 225
NIK,
-0.91%
in Japan slipped 0.9%. China’s Shanghai Composite
SHCOMP,
-1.40%
shed 1.4% after President Xi Jinping reiterated that the regime’s strict COVID-19 policy was “correct and effective.”
The comments added to worries that supply constraints in China could exacerbate global inflationary pressures. And such concerns were illustrated in Spain on Wednesday, where data showed prices rising by 10.2% in June, their fastest pace in 37 years. Europe’s Stoxx 600
SXXP,
-0.41%
fell 0.8%.
Oil prices crept higher, with WTI crude
CL.1,
+1.61%,
up 1.5% to $113.41 a barrel.
The yield on the U.S. 10-year Treasury note
TMUBMUSD10Y,
3.135%
eased 1.3 basis points to 3.167%.
Companies in focus
Shares of Pinterest Inc.
PINS,
-2.36%
rose 0.2% after the social-media company said co-founder Ben Silbermann is stepping down as chief executive and is being replaced by an e-commerce executive from Google.
Bed Bath & Beyond Inc.
BBBY,
-22.21%
shares fell 18.7% after it announced disappointing fiscal first-quarter results and the ouster of its chief executive, Mark Tritton.
General Mills Inc.
GIS,
+5.31%
shares rose 4.7% after beating quarterly expectations. The company posted fourth-quarter net income of $822.8 million, or $1.35 per share, nearly double $416.8 million, or 68 cents per share, last year. Adjusted EPS of $1.12, ahead of the FactSet consensus for $1.01 per share.
Other assets
The ICE U.S. Dollar Index
DXY,
+0.30%
edged down 0.01%.
Bitcoin
BTCUSD,
-1.04%
fell 4.6% to trade near $20,120.
August gold futures
GCQ22,
-0.12%
gained $6.30, or 0.4%, to settle at $1,827.90 an ounce.
U.S. stock futures fell, oil prices dropped and bond yields ticked lower after major indexes rallied to start the trading week, with recent volatility in markets showing few signs of abating.
Futures for the S&P 500 declined 1.4% Wednesday. Contracts for the tech-focused Nasdaq-100 contracted 1.6% and futures for the Dow Jones Industrial Average receded 1.2%. U.S. stocks rallied Tuesday off their worst week since March 2020, offering investors a reprieve from a recent stretch of whipsaw trading that had sent stocks and cryptocurrencies falling.
Stocks have seen sharp moves in recent weeks following aggressive interest-rate increases from the Federal Reserve, with more expected, as central banking officials seek to put a cap on inflation. Investors have scrambled to unload riskier assets amid growing fears that quick tightening of financial conditions will plunge the U.S. economy into a recession. The S&P 500 is on track for its worst first half of the year in decades, according to Deutsche Bank research analysts.
Recession fears weighed on shares of energy, autos and travel companies in premarket and European trading.
Occidental Petroleum
declined 4.1% premarket, while
Halliburton
shares fell 3.9%.
United Airlines Holdings
fell 3.3%.
The
Cboe
Volatility Index—Wall Street’s so-called fear gauge, also known as the VIX—rose 3.6% to 31.29.
Investors sought assets viewed as safer to hold Wednesday, such as the U.S. dollar and U.S. government debt. The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, added 0.2%.
In bond markets, the yield on the benchmark 10-year Treasury note ticked down to 3.228% from 3.304% Tuesday. Yields fall when prices rise.
“There is certainly an anxiousness in markets and that’s playing through in volatility,” said
Edward Park,
chief investment officer at U.K. investment firm Brooks Macdonald, adding that investors are likely awaiting fresh inflation data or a central bank meeting to assess their future trades.
Fed Chairman
Jerome Powell
is set to testify before Congress on both Wednesday and Thursday. Investors will be watching his words for clues about the future path of monetary policy.
In energy markets, Brent crude, the international benchmark for oil prices, dropped 4.4% to $109.63 a barrel. President Biden is planning to call for a temporary suspension of the federal gasoline tax, The Wall Street Journal reported. Energy prices remain near historically high levels as Russia’s invasion of Ukraine has caused Western nations to move rapidly away from Moscow’s supplies.
“This is a reminder for markets that governments are unlikely to sit back and take a higher oil prices,” Mr. Park said.
The dollar value of bitcoin, the world’s largest cryptocurrency by market value, edged down 2.1% from its 5 p.m. ET level Tuesday to trade at $20,393.06, according to CoinDesk. Cryptocurrencies have fallen recently amid broad investor desire to get out of speculative assets and concerns about the future of some crypto companies.
U.S. stocks rallied Tuesday off their worst week since March 2020.
Photo:
Seth Wenig/Associated Press
Overseas, the pan-continental Stoxx Europe 600 declined 1.6%, with losses led by the basic resources, oil-and-gas and autos sectors.
In Asia, major indexes closed with losses. South Korea’s Kospi declined 2.7%, China’s Shanghai Composite fell 1.2% and Japan’s Nikkei 225 edged down 0.4%.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
U.S. stock futures edged higher, pointing to muted gains for major indexes after the S&P 500 closed in a bear market for the first time since 2020.
Futures tied to the S&P 500 added 0.5% after the broad-market index tumbled 3.9% on Monday. Nasdaq-100 futures climbed 0.8%, suggesting a moderate rise in technology stocks after the opening bell. Dow Jones Industrial Average futures inched up 0.4%.
Global stocks have come under pressure in recent weeks on concerns that major central banks will have to move more aggressively than expected to combat inflation. The latest data release on consumer prices in the U.S. further stoked these fears, as it rose from the previous month to 8.6% and reached the highest level in more than four decades. The S&P 500 declined for the past four straight trading sessions, losing over 10%. The index is down nearly 22% from its last record high.
“I wouldn’t necessarily read a lot into a sort of mini reversal. Things got really oversold and now people are just going to wait for the Fed,” said Colin Graham, head of multiasset strategy at Robeco.
The Federal Reserve is set to release a monetary policy decision on Wednesday, after a two-day meeting. The Wall Street Journal reported on Monday that the policy makers are considering a surprise 0.75-percentage-point interest-rate increase.
Some investors are likely to be bargain shopping after such a sharp decline across markets, Mr. Graham said. “At one point yesterday, every single stock in the S&P 500 was down. As long-term investors, we search for value as long as the economic damage isn’t too great.”
Investors are struggling to come to terms with powerful forces in the market: soaring inflation that erodes consumer purchasing power, and the prospect of a recession that could damage company profits and tip weaker companies into failure. One bond market indicator, the yield curve difference between two-year and 10-year government debt, briefly inverted overnight, flashing a warning that a recession could be ahead. In the New York morning, it rose to 0.015 percentage point.
The U.S. yield curve last inverted in April, when shorter-dated Treasury yields rose more than longer-dated ones on expectations that the Fed could raise rates at a quick pace following a strong jobs report.
Bond markets were broadly more stable on Tuesday. The yield on the benchmark 10-year Treasury note declined to 3.337% from 3.371% on Monday, reversing direction after four consecutive days of rises. Prices rise when yields fall.
The yield on some shorter-dated bonds rose further, with the two-year edging up to 3.322% from 3.279% the day before,after its biggest two-day jump since the week after Lehman Brothers collapsed, according to an analysis by
Deutsche Bank.
The producer-price index, a measure of inflation for domestic producers, rose 10.8% on a 12-month basis in May, a slight decrease from the previous month.
While many markets have come under pressure this year, rising rates have had a particularly large effect on the shares of money-losing companies that were once pandemic darlings and other speculative bets. Higher interest rates on safe-haven assets such as government bonds tend to reduce the relative appeal of riskier investments—and the perceived value of future cash flows—while lifting corporate borrowing costs.
“I don’t think we’re going to see anything like a V-shaped recovery,” Rick Pitcairn, chief investment officer at Pennsylvania-based multifamily office Pitcairn, said of the stock market. “The way we’ll rebuild will be in a more muted way—it won’t be right back to the high-speculation stocks.”
As markets react to interest-rate hikes and the threat of a recession, stocks are dropping closer to bear-market territory. WSJ’s Gunjan Banerji explains what it takes to push stocks back into a bull market and why it’s hard to predict when they’ll turn around. Illustration: Jacob Reynolds
In premarket trading, business-software firm
Oracle
jumped 12% after reporting a rise in quarterly sales that beat analysts’ expectations, driven by its cloud-computing division. Oil producer
Continental Resources
rose nearly 9% after billionaire
Harold Hamm
offered to buy the shares his family doesn’t already own for around $4.3 billion.
Cryptocurrency platform
Coinbase
tumbled 7% ahead of the bell after it said it will reduce its workforce by about 18%. JPMorgan cut its price target for the stock.
Bitcoin remained under pressure after selling off sharply in recent days. It traded at about $22,150 on Tuesday, losing another 5%. It is 68% down from its last record high.
Overseas, the pan-continental Stoxx Europe 600 slipped 0.6%. Shares of French IT firm Atos plunged 24% after its CEO resigned and the company said it plans to spin off its big data and security division.
Bonds issued by the Greek government, one of the weakest European economies, sold off. The 10-year yield rose to 4.607%, the highest level since November 2018.
In Asia-Pacific trading, Australian stocks led losses after the market reopened following a holiday. The S&P/ASX 200 index in Sydney erased 3.6%, itsbiggest one-day drop in percentage terms in more than two years.
The Shanghai Composite Index rose 1%, while Hong Kong’s Hang Seng Index closed flat. Japan’s Nikkei 225 fell 1.3%.
The Japanese yen little changed, hovering close to the weakest level to the dollar in 24 years, which it reached on Monday.
In commodities, Brent crude, the global oil benchmark, gained 1.4% to trade at $123.90.
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Dave Sebastian at dave.sebastian@wsj.com
Shares in Asia remained under pressure on Tuesday.
U.S. stock-index futures sank Sunday after Wall Street’s worst week since January.
Dow Jones Industrial Average futures
YM00,
-1.25%
fell about 300 points, or 1%, as of midnight Eastern, while S&P 500 futures
ES00,
-1.65%
and Nasdaq-100 futures
NQ00,
-2.17%
posted even steeper declines.
Prices of bitcoin and other cryptocurrencies also slid over the weekend, with bitcoin
BTCUSD,
-7.71%
falling below the $26,000 level to its lowest point in 18 months, and more than 60% off its all-time high reached last November. Crude prices
CL.1,
-1.31%
dipped Sunday as well.
Stocks finished sharply lower Friday. The Dow
DJIA,
-2.73%
dropped 880 points, or 2.7%, to close at 31,392.79; the S&P 500
SPX,
-2.91%
slid 116.96 points, or 2.9%, to finish at 3,900.86; and the Nasdaq Composite
COMP,
-3.52%
slumped 414.20 points, or 3.5%, to end at 11,340.02.
For the week, the Dow fell 4.6%, the S&P 500 dove 5.1% and the Nasdaq sank 5.6%. It was the biggest weekly loss since January for all three major benchmarks, according to Dow Jones Market Data.
Read: Stocks sink again as hot inflation reading triggers market shock waves: What investors need to know
Markets fell following renewed inflation worries, as a new report showed hotter-than-expected readings. The consumer-price index on Friday showed U.S. inflation increased 1% in May, well above the 0.7% monthly rise forecast by economists surveyed by the Wall Street Journal. The year-over-year rate rose 8.6%, topping the 40-year high of 8.5% seen in March.
Federal Reserve policy-makers are set to meet this week, and are expected to raise interest rates by 50 basis points, though some economists think that after Friday’s CPI report, there may be support for a more aggressive 75-basis-point hike.
Also see: ‘Doves don’t exist on the FOMC right now’: Economists expect hawkish Fed meeting this week
“U.S. CPI for May was a nightmare for risk markets,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note Sunday. “The market is now thinking much more about the Fed driving rates sharply higher to get on top of inflation and then having to cut back as growth drops.
That will leave traders and investors “deliberating how much further tightening central banks’ will be able to deliver and, therefore, how much higher yields can go from here. And we all know nothing ever good happens when interest rate volatility spikes in capital markets,” he said.