Stock futures were lower in early morning trading Friday after a sharp Thursday sell-off on Wall Street spurred by the hottest inflation reading in four decades.
Futures on the Dow Jones Industrial Average dropped 140 points, or 0.4%. S&P 500 futures slipped 0.5% and Nasdaq 100 futures dropped 0.7%.
Thursday’s rout in risk assets came as Treasury yields spiked in reaction to data that showed consumer prices surged more than 7% last month, the highest gain since February 1982. The 10-year Treasury yield jumped above 2% for the first time since 2019, while the rate-sensitive 2-year yield soared more than 26 basis points at one point in its biggest intraday move since 2009.
The hotter-than-expected inflation reading prompted St. Louis Fed President James Bullard to call for accelerating rate hikes — a full percentage point increase by the start of July.
Futures market also repriced rate-hike odds as CME data pointed to an 89% chance of a 50-basis-point increase at the March meeting. Meanwhile, the market is forecasting a more aggressive schedule for the rest of this year, calling for seven hikes.
“The Fed has a Goldilocks and Three Bears Problem, since moving quickly and persistently off of policy that is too easy clearly needs to happen,” Rick Rieder, BlackRock’s chief investment officer of global fixed income, said in a note.
“While the time has come (or did months ago) to move policy persistently and aggressively away from overly accommodative conditions, and toward a more neutral and appropriate stance, executing on this pivot is going to be a real challenge for policymakers,” Rieder said.
Goldman Sachs shifted its expectations for the Fed this year, calling for seven rate hikes in an effort to cool an economy that has generated inflation far more persistent than policymakers had anticipated.
“There are good reasons to think that wage and price pressures will calm down and the economy will avoid a wage-price spiral. But there is enough ambiguity to raise concern,” Goldman economists David Mericle and Jan Hatzius said in a note. “Inflation should moderate this year as pandemic supply-demand imbalances fade and goods prices normalize, but the timing of that is uncertain, and the recent inflation trend is very firm.”
On Thursday, the blue-chip Dow dropped more than 500 points, breaking a three-day winning streak with its worst daily performance since Jan. 18. The S&P 500 and the Nasdaq Composite fell 1.8% and 2.1%, respectively.
Still, the major averages are on pace to post their third positive week in a row with modest gains. The Dow is up 0.4% this week, while the Nasdaq has gained 0.6%. The S&P 500 is only up 0.1% after Thursday’s decline.
“I expect that we’ll see a return of the volatility that was prevalent for most of the month of January in the wake of this report,” said Brian Price, head of investment management at Commonwealth Financial Network. “Investors may want to buckle up as it could be a rough ride for risk assets until inflationary data starts to abate, and I expect that it will, as we move through the year.”
Thursday’s rout in risk assets came as Treasury yields spiked in reaction to the hottest inflation reading in four decades.