Nasdaq, S&P 500, Dow Jones rebound and yields fall back from highs

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Stocks bounced around near the unchanged mark late in Wednesday’s trading, as investors weighed a hotter-than-expected read on inflation and updated information from the Federal Reserve.

The Dow (DJI) is -0.2%, the S&P (SP500) is +0.2% and the Nasdaq (COMP.IND) is +0.4%.

In the bond market, longer-term durations saw a decline in yields, while shorter-term instruments experienced a spike, indicating that traders leaned to price in a recession over inflation. The 10-year Treasury yield is down 5 basis points to 2.91%. The 2-year is up 10 basis points to 3.14%.

The dollar strengthened and broke through parity with the euro.

Headline June CPI rose 1.3% on the month, topping forecasts of 1.1%. It hit an annual rate of 9.1%. Core CPI rose 0.7%, ahead of the 0.6% consensus, and was up 5.9% y/y.

“Looking forward, inflation will come down over the next couple of months,” Mohamed El-Erian tweeted. “That’s the good news. Less good is that a third wave of inflationary pressures is building and will be unleashed if the Fed doesn’t get its act together quickly.”

“With the first best policy option now long gone due to the first two stages of the ongoing Fed policy mistake, the recession risks are increasing accordingly. This threatens a second big hit for households, especially the most vulnerable segments of our society. And to think that much of this could have been avoided.”

The numbers cement at least a Fed hike of 75 basis points this month and markets now see a 41% chance of a full point, according to CME FedWatch. Swap markets are pricing in 82 basis points for the July meeting.

“We remain of the view that core inflation, especially the core PCE, is likely to fall faster than markets expect over the next year, thanks to margin re compression, slower wage gains, lower commodity prices, and the stronger dollar,” Pantheon Macro said. “But right now this report will make for very uncomfortable reading at the Fed.”

In the afternoon, the Fed released its Beige Book, a collection of anecdotal information from the central bank’s various branches. The report showed that U.S. economic activity “expanded at a modest pace” since mid-May, although concerns about a recession also increased.

Among active stocks, Twitter is among the biggest S&P gainers after it filed suit against Elon Musk.