The stock market ended mostly down Tuesday as bond yields hit new highs and investors braced for tough medicine from the Federal Reserve.
The central bank meets Wednesday to consider another interest rate increase—likely even three-quarters of a percentage point.
The
Dow Jones Industrial Average
dropped 152 points, or 0.5%, while the
S&P 500
fell 0.4%; the
Nasdaq Composite
rose 0.2%. All three indexes had been up earlier in the morning, but the moves overall were nothing compared with Monday, when the S&P 500 fell nearly 4%.
The 10-year Treasury yield rose to about 3.48%, its highest level since 2011. The 2-year Treasury yield rose to about 3.42 %, the highest since 2007.
These movements have been denting the stock market. Bond prices now reflect expectations that the Federal Reserve will lift interest rates quickly, rather than gradually, in response to inflation that doesn’t seem to be declining yet.
And that narrative got some more support Tuesday, as the producer price index for final demand rose 0.8% month-over-month in May, in line with expectations, but above the prior result of 0.4%. That means companies are seeing rising costs, prompting them to raise prices as they look to protect their profit margins. All three major U.S. indexes fell at least 5% over the past month through Monday’s close, during which time the 2- and 10-year yields surged.
For now, it seems bond yields just can’t come downward. There is a high likelihood that the Fed will hike rates by three-quarters of a percentage point, rather than the previously-expected half-point, at its June 15 meeting. The fed funds futures market is reflecting a more than 90% chance of a three-quarters of a point hike, up from just a 35% probability a day ago.
“Yesterday’s sharp cross-market sell off represents a market finally coming to terms with the painful steps that will be required to reduce the 40 year high inflation,” wrote Andrew Hollenhorst, Citigroup economist. “A 75 basis point [three-quarters of a point] rate hike is a real possibility at tomorrow’s FOMC meeting.”
Seeing that stocks and bonds have both sold off so badly, it might seem surprising that they couldn’t rebound a bit Tuesday.
“There was a modest turnaround Tuesday attempt at the open but ahead of the Fed decision there is little appetite to get aggressive,” wrote Michael Reinking, senior market strategist at New York Stock Exchange.
Instead, it was another tough day, but the next big move might come Wednesday.
That is when the Fed makes its interest rate announcement. It is now unlikely that the Fed will have the luxury of talking about slowing down the pace of rate hikes, and more likely that it will emphasize the need to cool down demand and inflation. Markets have begun to anticipate that.
“Markets believe the US Federal Reserve is going to need a bigger number of rate hikes to try to slow demand and control inflation,” writes Kristina Hooper, chief global market strategist at Invesco.
Whether that brings a sharp move up or down in stocks isn’t clear. The S&P 500 and Nasdaq are already in bear markets, defined as 20% or worse declines.
Those drops bring about some chance that the stock market will rally if it sees that the Fed isn’t delivering worse news than what is anticipated. One possible outcome Wednesday afternoon: “A mild relief rally given the declines of the past few days,” wrote Tom Essaye, founder of Sevens Report Research.
To that point, the stock market looks like it is in an “oversold condition.” That means the selling can’t get much worse for the near-term, especially if news from the Fed isn’t worse-than-expected. More than 90% of Nasdaq stocks are in a bear market, according to Sentimentrader. Historically, that means stocks will post gains in the coming moths, the firm’s data show.
Overseas, the pan-European
Stoxx 600
slipped 1.3%, and Tokyo’s
Nikkei 225
lost 1.3% to follow Wall Street lower from Monday.
Here are six stocks on the move Tuesday:
After closing at a record low on Monday following an 11% slide,
Coinbase Global
(ticker: COIN) fell 0.8% Tuesday. The cryptocurrency exchange as well as other companies exposed to digital assets have endured a brutal selloff. Software group
MicroStrategy
(MSTR)—which holds significant Bitcoin on its balance sheet—fell 25% Monday and gained 3.1% Tuesday.
Oracle
(ORCL) stock has gained 11% after the company reported a profit of $1.54 a share, beating estimates of $1.37 a share, on sales of $11.8 billion, above exceptions for $11.6 billion.
Continental Resources
(CLR) stock jumped 16% after the company said it received a take-private offer from oil and gas entrepreneur Harold G. Hamm for $70 a share.
Tractor Supply
(TSCO) stock gained 0.1% after getting upgraded to Buy from Neutral at Bank of America.
AstraZeneca
(AZN) stock dropped 1.3% after getting downgraded to Neutral from Buy at UBS.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com
Read More: Stocks Give Up Gains as Investors Brace for Big Rate Hike From the Fed