Stocks Fluctuate, Yields Rise on Inflation Debate: Markets Wrap

US futures advance; S&P 500 flat, Nasdaq 100 dropped in May
EU inflation at record, oil adds to rising price pressures

Stocks in Asia were mixed Wednesday and bond yields extended their advance amid a debate about the scale of monetary tightening to fight inflation.

Equities climbed in Japan as the yen weakened. A pullback in technology stocks and reopening challenges were a drag in Hong Kong. Sluggish Chinese manufacturing data and the government’s pursuit of Covid Zero weighed on shares and the yuan. US futures rose after benchmarks retreated Tuesday.

Treasuries extended a decline, pushing 10-year yields closer to 2.9% as traders raised bets on Federal Reserve interest-rate hikes. Euro-zone consumer prices jumped 8.1% to a record from a year earlier in May, further spooking investors. The dollar advanced.

Oil rose to near $115 a barrel as investors assessed the future of OPEC+ unity, just as ministers from the group prepare to meet on Thursday to discuss its supply policy for July. Crude rose after advancing about 10% in May, stoking inflation worries.

Concerns that central-bank rate hikes may induce a recession are keeping investors guessing about the outlook for the economy as rising food and energy costs squeeze consumers, and volatility has picked up.

“It’s times like these when investors need a crystal ball,” wrote LPL Financial strategists Jeff Buchbinder and Ryan Detrick. “We fully acknowledge how tough it is to see the bull case for stocks right now, and a retest of recent lows is certainly possible, but this week we lay out the bull case for the second half of the year. It starts with inflation.”

President Joe Biden used a rare meeting with Federal Reserve Chair Jerome Powell to declare that he’s respecting the central bank’s independence - while simultaneously shifting responsibility for taming decades-high inflation ahead of the November midterms. The meeting came ahead of US payroll numbers Friday.

“There are heightened concerns around inflation and where central banks are likely to go trying to combat inflation,” Kristina Hooper, Invesco Advisers chief global markets strategist, said on Bloomberg Radio. “This has gone from just an inflation scare to a growth scare. Uncertainty has grown.”

How will markets be affected by the Fed’s quantitative tightening? QT officially starts Wednesday and is the theme of this week’s MLIV Pulse survey. Click here to participate anonymously.

Here are some key events to watch this week:

The Federal Reserve is set to start shrinking its $8.9 trillion balance sheet Wednesday
The Fed releases its Beige Book report on regional economic conditions Wednesday
New York Fed President John Williams, St. Louis Fed President James Bullard speak at separate events Wednesday
OPEC+ virtual meeting Wednesday
Cleveland Fed President Loretta Mester discusses the economic outlook Thursday
US May employment report Friday
The UN’s Food and Agriculture Organization releases its monthly food price index at a time of maximum concern about global supplies on Friday