Stocks in the U.S. sank Monday as investors digested a report last week showing that inflation in May surged at the fastest pace in four decades.
Futures contracts for the S&P 500 tumbled 2.7% before the official start of trade on Wall Street, putting the index on the cusp of a bear market. Other benchmark indexes also flashed red, with futures for the Dow Jones Industrial Average and Nasdaq Composite dropping 1.8% and 2.9%, respectively.
On Friday the S&P 500 sank 2.9%, locking in its ninth losing week in the last 10. The U.S. government’s report that inflation accelerated to 8.6% in May, from 8.3% the previous month, was taken to mean that the Federal Reserve will continue to raise interest rates. Cryptocurrency prices also slid, with bitcoin sliding to $23,981 — its lowest since December 2020, according to Bloomberg.
“The brief window of hope that opened in the back half of May as it looked like U.S. inflation/Fed tightening forecasts were hitting a peak and China was reopening has snapped violently shut, and investors are back to wallowing in a hole of despair following the huge CPI on Friday and the modest COVID setbacks in China,” analyst Adam Crisafulli, founder of Vital Knowledge, said in a note.
Overseas stocks also slumped. Germany’s DAX lost 1.9% to 13,496.91 and the CAC 40 in Paris declined 2.2% to 6,052.73. Britain’s FTSE 100 lost 1.5% to 7,208.31.
Fierce inflation is taking a toll on consumers. A University of Michigan index on Friday showed that consumer confidence fell to a 50-year low in early June. Average gas prices surged above $5 a gallon for the first time ever this weekend, according to AAA.
Americans typically drive more starting around Memorial Day, so demand is up. Global oil prices are rising, compounded by sanctions against Russia, a leading oil producer, because of its war against Ukraine. And there are limits on refining capacity in the United States because some refineries shut down during the pandemic.
Federal Reserve officials are scheduled to meet this week for their policy meeting, and investors expect them to raise interest rates at least half a percentage point in a bid to rein in inflation. Some Wall Street analysts think the pace of monetary tightening is likely to tip the economy into a recession.
“With the recent inflation data providing no ‘clear and convincing evidence’ that inflationary pressures will recede without stronger policy actions, the challenge for monetary policymakers of guiding inflation back to target without depressing demand to the point of triggering a recession has gotten that much more difficult,” analysts with Deutsche Bank told investors in a research note.
“In our view, achieving such a ‘soft landing’ looks very unlikely given the degree of monetary tightening needed to combat the seemingly endless stream of inflationary shocks and rising inflation expectations,” they added.
