Dow futures plunge 600 points and a key bond yield hits a 15-year high as surging inflation shakes markets

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Friday’s inflation print shocked investors.Xinhua News Agency/Getty Images

  • Dow futures shed over 600 points Monday as stronger-than-expected inflation sent shockwaves through markets.

  • The 2-year US Treasury note yield jumped to its highest since 2007, as predictions for interest-rate hikes ramped up.

  • US CPI inflation came in at 8.6% year-on-year in May, topping expectations for an 8.3% reading.

Dow futures shed about 600 points Monday, and the 2-year US bond yield hit its highest level since 2007, as Friday’s higher-than-expected inflation figures rocked financial markets.

Futures on the Dow Jones Industrial Average were down 1.91%, or 598 points, as of 6:10 a.m. ET. S&P 500 futures fell 2.36%, and Nasdaq 100 futures slid 2.93%.

European stocks also tumbled, with the continent-wide Stoxx 600 down 2.16%. Asian stocks dropped overnight, with Tokyo’s Nikkei 225 plunging 3.01% and China’s CSI 300 falling 1.17%.

The sell-off in stocks followed the release of US data on Friday that showed inflation reached a 41-year high of 8.6% in May, above economists’ expectations for the rate to flatline at 8.3%.

US inflation hit 1% month-on-month, again far outstripping predictions. Monthly core inflation, which strips out volatile food and energy prices, came in at an elevated 0.6% for the second month running.

The unexpected pick-up in price growth brutally collided with investors’ hopes that inflation was cooling. That sparked a sharp drop in stocks Friday, when the Dow Jones dropped 2.73% and the S&P 500 tumbled 2.91%.

“Markets have set off on another rocky ride over inflation fears,” said Steve Clayton, fund manager at Hargreaves Lansdown.

Analysts rapidly dialed up their expectations for Federal Reserve interest-rate hikes over the weekend.

Goldman Sachs’ economy team, led by Jan Hatzius, said in a note they now expect the Fed to hike interest rates by 50 basis points at three meetings: this week, in September, and in November. The US central bank will announce any policy decision at the end of its two-day meeting on Wednesday.

The Goldman Sachs team predicted the Fed will make two final 25 basis point hikes in December and January, taking the target federal funds range to 3.25-2.5%. The rate currently stands at 0.75-1%, after a 50 basis point hike in May.

Changes in Fed predictions jolted the bond market on Monday. Yields, which move inversely to prices, shot higher.

The yield on the 2-year US Treasury note, which is the most sensitive to interest rates, jumped to a high of 3.241% — a level not seen since 2007. It later pared its gains to stand at 3.204%.

Meanwhile, the yield on the key 10-year US Treasury note — which sets the tone for borrowing costs worldwide — climbed 7.2 basis points to stand at 3.235%, around the highest since 2011.

The dollar resumed its March higher, boosted by expectations that US interest rates will rise above those seen elsewhere. The dollar index was up 0.48% to 104.65, just shy of its highest level since 2002.

Despite the nervousness among traders, some analysts believe the Fed can raise interest rates and cool inflation without triggering a recession.

“Although we expect growth to continue to moderate, we also do not expect a significant downturn this year,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

“A sharp fall in household spending looks unlikely given high levels of job security.”

Elsewhere in markets, cryptocurrencies investors suffered another brutal weekend as investors ditched riskier investments, which look less attractive when bond yields rise.

Bitcoin traded at around $23,850 Monday morning, roughly 20% below where it stood on Friday. Ethereum was harder-hit, losing around 30% since Friday morning to trade around $1,215.

Oil prices, which have surged more than 50% this year, pulled back slightly. Brent crude was down 1.52% to $120.17 a barrel, while WTI crude was 1.65% lower at $118.70 a barrel.

The yen hit its lowest level against the dollar in 24 years on Monday, as traders signaled their belief that the Bank of Japan will press ahead with its ultra-loose monetary policy.

Read more: Home sellers are going to have to start cutting prices, says a real estate expert at a legendary $122 billion bond shop who learnt his craft during the global financial crisis. He lays out 4 reasons it won’t trigger a housing collapse this time.

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