June 28, 2022

Stocks and Bonds to Feel more Pain in Week Ahead

The staggering inflation figures in the US are threatening to trigger declines in stocks and bonds alike. This would mean that investors cannot expect the US Federal Reserve to half its most aggressive pace of tightening the monetary policy that has not been seen in decades.

What will Happen in the Coming Weeks?

There were some hints on Friday as to what investors can expect in the next couple of weeks. There was an almost 3% drop in the benchmark S&P 500 index, while the 10-year Treasury bond yields surged to their highest level that hadn’t been seen after early May. This was after the inflation data turned out to be stronger than expected and indicated that the Fed would hike up the rate even more aggressively this year.

Market strategists stated that the inflation data had come as a huge disappointment because the hopes of inflation hitting a peak were now dashed. The concerns about further inflation and the impact it would have on Corporate America are a major worry. Most of 2022 have seen bonds and stocks fall, as risk appetite was reduced because of the Fed’s tightening policy.

Investors who had been depending on the combination of these two assets to mitigate falls in their portfolio have been battered rather severely. In the last few weeks, the moves saw a reversal, as investors hoped that peak inflation would push the Fed into slowing down. However, expectations of a less hawkish stance from the Federal Reserve are low.

Instead, more declines are expected because markets have now priced in interest rate hikes of a minimum 50 basis points in each of the policy meetings of the American central bank. Market analysts said that since price pressures in the country continue to mount, there are not many signs of easing. Therefore, it is likely that the bonds and stocks market are in for some more pain, as the stock market will remain under pressure and yields will rise.

More Hawkish Views

The CPI data released on Friday showed an increase of 8.6% in the month of May. This has prompted some banks on Wall Street to raise their forecasts of just how high the Fed will take the interest rate in order to staunch inflation. This would result in maximum pain for investors.

According to Barclays, the Fed will raise its interest rate by 75 basis points in their meeting next week, which would be a first in the last 28 years. Strategists at Goldman Sachs believe that the Fed will raise 50 basis points in each of its upcoming three meetings.

On Friday, the prices of fund futures of the Fed showed that a 75 basis points increase in July had better-than-even chances. The interest rate has already been increased by the US Federal Reserve by 75 basis points so far in 2022. However, there are also some investors who believe that the bank will stop take a step back from its inflation-fighting journey if equity markets continue to decline.

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