Dow Futures Drop, Bond Yields Surge, Bitcoin Tumbles—and What Else Is Happening in the Stock Market Today

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The Federal Reserve is expected to announce an interest rate hike this week. But by how much?

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Stocks dropped on Monday, continuing declines from last week as fears loomed large over inflation and whether Federal Reserve policy to tame it will cause a recession.

Futures for the Dow Jones Industrial Average retreated 600 points, or 1.9%, after the index lost 880 points on Friday to close at 31,392. S&P 500 futures signaled a start 2.4% into the red with the tech-stock heavy Nasdaq poised to fall 3%; the S&P 500 and Nasdaq declined 2.9% and 3.5% on Friday, respectively.

Overseas, the pan-European Stoxx 600 fell 1.8% and Tokyo’s Nikkei 225 ended 3% lower.

Monday’s tumble follows a deep selloff on Friday, catalyzed by U.S. consumer price index (CPI) inflation data showing prices rose more than expected in May. With inflation at a multidecade high—and showing few signs of peaking —pressure is building on the Federal Reserve to move aggressively to tighten monetary policy.

“Markets have set off on another rocky ride over inflation fears,” said Steve Clayton, a fund manager at Hargreaves Lansdown . “Investors are now fretting that the economic data will force the U.S. Federal Reserve’s hand into pushing interest rates up, further and faster than previously forecast.”

Bond yields surged. The 2-year U.S. Treasury note, which attempts to forecast the Fed’s benchmark rate a couple of years from the present, moved as high as near 2.94% on Friday, the highest intraday level since late 2008. The yield on that note shot up above 3.22% on Monday, the highest since 2007, while the 10-year U.S. Treasury yield surged to 3.24%.

The 2 year yield was as high as 2.937% today. This is the highest intraday level since Nov. 9, 2018.

The 2-year Treasury yield, which attempts to forecast the level of the federal-funds rate a couple of years from the present, jumped from 2.85% to just over 3% minutes before the inflation result hit the wires. The 2-year’s yield is now at a multiyear high.

The Fed is attempting to battle inflation with interest-rate increases and a reduction in its bondholdings. Having already raised rates twice this year, the Fed is expected to do so again this week after its monetary policy committee meets on Wednesday. The macro risk for markets is whether the Fed can engineer a “soft landing”—bringing down inflation by denting economic demand without causing a recession.

Ahead of its meeting this week, investors are considering whether the Fed will raise rates by a sizable 50 basis points this week—most increases are 25 basis points, which is one-quarter of a percentage point—or head for a supersize 75 basis-point hike.

“In the wake of another shocking U.S. CPI print on Friday, should a 75 basis-point hike not be a serious consideration?” said Jim Reid, a strategist at Deutsche Bank. “Without the recent Fed guidance, 75 basis points would be firmly on the table for Wednesday. This is highly unlikely this week, but our economists think they could break cover from their own guidance and leave the door open for 75 basis-points in July.”

Bitcoin and other cryptocurrencies were deep into the red. Bitcoin—the largest digital asset—tumbled 11% over the past 24 hours to below $24,400, the lowest levels since late 2020. 

Cryptos have largely proved to be correlated to the stock market, so the recent selloff in equities heaps downward pressure on Bitcoin and its peers. Pain in digital assets was exacerbated by crypto lending platform Celsius Networks ceasing withdrawals of crypto deposits from its platform.

Write to Jack Denton at jack.denton@dowjones.com