Stocks and Bonds Fall on Fears of Further Interest Rate Hikes

The Dow (-2.0%), NASDAQ (-0.9%), and S&P 500 (-1.1%) each fell for the week.  Similarly, taxable bonds fell about 1.3% and tax-free municipal bonds dropped about 0.3%.  Meanwhile, the 10-year Treasury yield rose 0.24% to close the week at 4.05%, above the key 4% milestone.

Markets tend to be more volatile during the summer, especially in a holiday-shortened week, as trading volume is typically well below average.  Regardless, both stocks and bonds fell because the markets are expecting that the Fed will continue its aggressive interest rate hiking campaign to dampen inflation.  That was fueled by the release of the Fed meeting minutes that demonstrated many of the Fed members felt they should have raised interest rates at their last meeting in June, in which they did not.  With the influx of additional economic data, there is now a 90% chance that the Fed hikes rates again at its next meeting in two weeks.

This week, there will be two key inflation data points being released – the Consumer Price Index (CPI) and Producer Price Index (PPI).  Unless if these data are unexpectedly tame, they will likely help solidify the Fed’s intentions of a rate hike in late July.  Further, we will be starting corporate earnings season with the big banks reporting their quarterly earnings on Friday.  It’s not as much what the banks will report from the 2nd quarter, as that is looking into the rear-view mirror.  More importantly, investors will be focusing on their projections of economic conditions, and the banks have a pretty good handle on that.  Thus, between now and the Fed meeting on July 26, there will be plenty of volatility in the markets, so buckle up.

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^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}