Dow Futures Slump 545 Pts; Inflation Fears Weigh on Sentiment

By Peter Nurse

© Reuters Dow Futures Slump 545 Pts; Inflation Fears Weigh on Sentiment — U.S. stocks are seen opening sharply lower Monday, with investors fretting ahead of a key Federal Reserve meeting following a red-hot consumer inflation report.

At 7:15 AM ET (1115 GMT), the Dow Futures contract was down 545 points, or 1.7%, S&P 500 Futures traded 90 points, or 2.3%, lower and Nasdaq 100 Futures dropped 330 points, or 2.8%.

The main indices on Wall Street closed with hefty losses on Friday after the May consumer price index came in stronger than expected, climbing at an annual rate of 8.6%, the highest reading since 1981. The blue chip Dow Jones Industrial Average dropped 880 points, or 2.7%, the broad-based S&P 500 fell 2.9% and the tech-heavy Nasdaq Composite closed 3.5% lower. These indices posted their biggest weekly declines since late January.

The Federal Reserve is scheduled to meet this week, with policymakers expected to raise interest rates by a half-percentage point on Wednesday in a bid to tame inflation.

But Friday’s CPI release has increased fears that the Fed will have to act aggressively for a longer period than previously envisaged, increasing the risks that the economy will be forced into a recession.

“Unexpectedly persistent demand, and the inflationary pressure this is fueling, has led us to make a further upward revision to our outlook for Fed policy,” said analysts at ABN Amro, in a note.

“Following the 50bp expected hikes in June and July – already well flagged to markets by FOMC members – we now expect the Fed to continue raising rates at this pace, with the fed funds rate now expected to rise to 3.75-4.00% by February.”

Concern that the surging inflation will require more rapid Federal Reserve policy tightening has seen U.S. Treasury yields soar. The benchmark 10-year yield touched 3.25% earlier Monday and the 2-year yield rose to its highest level since late 2007, briefly exceeding the 10-year for the first time since early April.

Oil prices slipped Monday as a burst of new COVID-19 cases in Beijing, China’s capital city, thwarted hopes of a rapid increase in demand from the world’s largest crude importer.

Also weighing on the price of crude is the prospect of further US monetary tightening to combat surging inflation, boosting the dollar and potentially causing a sharp economic slowdown.

By 7:15 AM ET, U.S. crude futures traded 1.5% lower at $118.81 a barrel, while the Brent contract fell 1.4% to $120.28.

Additionally, gold futures fell 0.8% to $1,860.40/oz, while EUR/USD traded 0.5% lower at 1.0462.