The S&P fell 3.2% in early trading Monday. If the loss holds to the market’s close, the broad index would fall into a bear market for the first time since 2020.
Markets have swung this year as investors assessed the risks of surging inflation and central bankers’ plans for unwinding stimulus policies that kept economies and markets afloat throughout the pandemic. This latest bout of volatility came after data Friday showed U.S. consumer prices rose 8.6% year-over-year in May, the fastest such rise since 1981.
The report forced many to reset expectations for higher interest rates from the Federal Reserve.
“The very fact that it overshot expectations has really frayed investors’ nerves even more and shown how difficult it is to try to keep a lid on inflation,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“The worry is that inflation is getting too hot to handle for central banks and they’ll have to dose economies with cold water in the form of tighter policy.”
The Fed will begin its latest two-day policy meeting Tuesday, and most investors believe that the central bank will announce Wednesday it is raising its benchmark interest rate by half a percentage point. But expectations that the Fed will be forced to move even more aggressively this year have risen since Friday’s inflation report.
On Monday, futures bets showed traders assigned a roughly 81% probability that the Fed will raise interest rates by 2.5 percentage points by the end of the year, according to CME Group. That would equate to a half-percentage rate increase at every Fed meeting this year.
On Friday, traders placed the odds of that at 50%, according to CME Group.
“It seems as though inflation is staying for longer than expected,” said Kiran Ganesh, a multi-asset strategist at UBS. “People are now beginning to fear that the Fed will have to go further or faster in terms of interest rates.”
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