The U.S. Rate Markets Pricing in A 75-Basis-Point Boost
Investors have drastically increased their wagers that the U.S. Federal Reserve would hike interest rates by 75 basis points (bps) instead of 50 bps on Wednesday, fueling a major selloff across global markets.
According to CME’s Fed Watch Tool, expectations for a 75-bps raise at the June meeting soared to 89 percent on Tuesday, up from 3.9 percent a week earlier. As a result, the likelihood of a 50 basis point rate rise on Wednesday has dwindled to 11% from a near-certainty a week ago. Investors are concerned that a 75-basis-point rate hike, the largest since 1994, could depress equity valuations, particularly in technology sectors, and imperil the post-COVID-19 rebound. The S&P 500 equities index, down more than 20% from its most recent closing high, has entered a so-called bear market, as seen by Monday’s selloff.
Should You Be Prepared for a Hawkish Rate Rise?
On Tuesday, investors continued to dump U.S. equities as they braced for a more aggressive Fed. On Tuesday, U.S. two-year rates, extremely sensitive to rate predictions, reached 3.439 percent, the highest level since November 2007. The benchmark 10-year yield in the United States reached 3.479 percent, the highest level since April 2011. On Tuesday, the yield curve between two-year and 10-year notes inverted by 5.4 basis points, signaling an impending recession. At 4.2 basis points, the curve was the last steeper. The Fed’s two-day meeting finishes on Wednesday. Statistics released last Friday indicate that consumer prices in the United States have grown quickly since 1981.
The consumer price index (CPI) in the United States increased 8.6% year over year in the 12 months ending in May, the highest increase in over 40 years. On a year-over-year basis, the so-called core CPI increased by 6.0 percent in May. Some investment banks, including Goldman Sachs (NYSE: G.S.), are now forecasting 75 basis point rises in June and July, followed by a 50-basis point increase in September. T.D. Securities predicts the same rate rises in June and July.
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