Stocks, Bonds Set for Volatility on Inflation Woes: Markets Wrap

(Bloomberg) — Stocks and bonds are at risk of more losses when markets open in Asia on Monday following a shock US inflation print that heaped pressure on the Federal Reserve to intensify monetary tightening.

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Equity futures indicate declines in Japan and Hong Kong after a 4.4% loss for the MSCI AC World index last week, the worst over such a span since 2020.

Bonds may come under pressure in the slipstream of a Treasuries slump that propelled the US two-year yield to the highest in 14 years. Yields on 30-year Treasuries are now below those on five-year notes, pointing to fears that aggressive Fed interest-rate hikes will lead to a hard economic landing.

The dollar was mixed in early trading after a greenback gauge hit a one-month high on haven demand amid the toxic mix of rising costs and slower growth. Oil, one of the commodities stoking price gains, remains above $120 a barrel.

Markets will also have to contend with Covid outbreaks in China, where Beijing and Shanghai resumed mass virus testing. The fear is China’s Covid-zero strategy will lead to repeated lockdowns that damage both its economy and global supply chains. The latter are also being affected by the war in Ukraine.

“At some point financial conditions will tighten enough and/or growth will weaken enough such that the Fed can pause from hiking,” Goldman Sachs Group Inc. strategists including Zach Pandl wrote in a note. “But we still seem far from that point, which suggests upside risks to bond yields, ongoing pressure on risky assets, and likely broad US dollar strength for now.”

The US consumer price index rose 8.6% in May from a year earlier — a fresh 40-year high — in a broad-based advance, adding to a slate of troubling inflation data globally. Many investors expect half-point Fed rate hikes this week and again in July and September. Barclays Plc and Jefferies LLC said an even bigger 75-basis-point move is possible at the June meeting.

No Smooth Ride

The volatility in Treasuries “can’t be anything that any central bank would welcome,” Sonal Desai, Franklin Templeton’s fixed income chief investment officer, said on Bloomberg Television. “We’re going to see more of the same. It’s not going to be a nice, smooth grind upwards. The Fed is going to need to do more.”

Asian currencies may also come under pressure amid dollar strength. The yen remains in sight of a 24-year-low against the greenback on the stark policy contrast between a hawkish Fed and a still dovish Bank of Japan. Senior Japanese officials delivered a ramped-up warning on the yen Friday, seeking to keep a floor under the currency.

Poor sentiment was evident over the weekend in a cryptocurrency slide that took Bitcoin as low as $26,877, the weakest since mid-May.

In Australia, financial markets are closed for a holiday.

What to watch this week:

First WTO ministerial meeting in nearly five years. Through June 15.
ECB’s Luis De Guindos due to speak, Monday.
US PPI, Tuesday.
China key economic activity data, liquidity operations, medium-term lending facility, Wednesday.
FOMC rate decision, Chair Jerome Powell briefing, US business inventories, empire manufacturing, retail sales, Wednesday.
ECB President Christine Lagarde due to speak, Wednesday.
Bank of England rate decision, Thursday.
US housing starts, initial jobless claims, Thursday.
Bank of Japan policy decision, Friday.
Eurozone CPI, Friday.
US Conference Board leading index, industrial production, Friday

Some of the main moves in markets:

Stocks

The S&P 500 fell 2.9%
The Nasdaq 100 dropped 3.6%
Nikkei 225 futures shed 1.8%
Hang Seng futures declined 1.7%

Currencies

The Bloomberg Dollar Spot Index rose 0.8%
The euro was at $1.0516
The Japanese yen was at 134.37 per dollar
The offshore yuan was at 6.7374 per dollar

Bonds

Commodities

West Texas Intermediate crude was at $120.67 per barrel
Gold was at $1,871.61 an ounce