US bond yields rise as financial markets fall and inflation jumps

All of the major indexes – Dow Jones Industrial Average, S&P 500 and the Nasdaq Composite – fell today, raising concerns of a looming recession following reports last week from the US Bureau of Labor Statistics making report of a consumer inflation rate of 8.6%, the highest in 40 years, and a 3.0% drop in real incomes for the month of May. According to the Wall Street Journal, investors and traders are now speculating that the Federal Reserve will raise interest rates “higher and faster than expected.”

“The inflation reading has also boosted expectations for the Fed’s benchmark rate hike,” according to Matt Grossman of The Wall Street Journal. “Investors now expect officials to hike rates to nearly 4% by next spring, up from the expected peak of around 3% last month.”

The yield on the 10-year Treasury note closed today at 3.371%, a 10-year high. The yield on two-year Treasury bills settled at a new 15-year high of 3.279%. Higher rates mean higher borrowing costs for businesses, which affects their profit margins and can lead to asset deflation as mortgage rates rise for borrowers.

Trend in 10-year treasury bills over the past year. Source: Yahoo Finance.

Overall, the S&P 500 fell 151.23 points, or 3.9%, to 3,749.63, falling into a bear market for the first time in more than two years. Stocks enter a bear market when their index falls 20% from its highs.

The Nasdaq Composite fell 530.80 points, or 4.7%, to 10,809.23. The Nasdaq Composite, which mirrors the tech sector, has been in a bear market since March 2022.

The Dow Jones Industrial Average, which reflects industrial and banking stocks, fell 876.05 points, or 2.8%, to 30,516.74. Although the Dow Jones Industrial Average has yet to hit a bear market, it has undergone a correction – a drop of at least 10% in price from the last high.

Typically, a bear market – a decline in stock values ​​- precedes a recession. A recession, on the other hand, is a general decline in a country’s production of goods and services, measured usually as two consecutive quarters of declining growth, as determined by the National Bureau of Economic Research.

Real Gross Domestic Product (GDP) decreased at an annual rate of 1.5% in the first quarter of 2022, according to the “second” estimate published by the Bureau of Economic Analysis. The original estimate was reported as a decrease of 1.4%. In the fourth quarter of 2021, real GDP grew by 6.9%. According to the Atlanta Federal Reserve, the GDP estimate for the second quarter of 2022 hovered around 2.0% for the month of May, but has since fallen to 0.9% as of June 8. Its estimates during the first quarter of 2022 hovered around 1.0% until the days before the BEA’s release of -1.4%.

can inflation

The cryptocurrency market was not immune to today’s selloff. Bitcoin fell 17% to below $23,000 on Monday, down 66% from its November high. Binance was forced to halt trading due to a backlog issue, while crypto firm BlockFi later announced it was laying off 20% of its workforce due to the tough market environment.

May Consumer Inflation Index

The consumer price index for all urban consumers (CPI-U) rose 1% in May to reach a 12-month rate increase of 8.6% according to the United States Bureau of Labor Statistics – the largest 12-month increase since December 1981.

Gasoline inflation is 48.7% from a year ago, directly impacting farms, commuters and the supply chain. Over the past year, food prices rose 11.9% at grocery stores, the largest 12-month increase since April 1979. Meats, poultry, fish and eggs rose 14.2 %. Dairy products are 11.8% more expensive, cereals and pastries up 11.6%.

Real average hourly earnings for all employees fell 0.6% from April to May, equivalent to a seasonally adjusted decline in earnings of 3.0% over the past 12 months. Average hourly wages for production and non-supervisory workers fell 0.5% from April to May, equivalent to an annual decline of 2.5%.

“Correct” inflation calculations for May 2022

The CPI-U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the Bureau of Labor Statistics (BLS). It measures the change in prices paid by consumers for goods and services. Methodologies for calculating inflation have changed over the years – once in the 1980s and the other in the 1990s. These changes in the calculations lowered the reported core inflation now used by the BLS .

According to ShadowStats.com, actual inflation based on the 1980 calculation would be 16.80%, a new high for 75 years.

In the chart below, ShadowStats.com, Alternative Government Economic Statistics for the United States, shows SGS-Alternate CPI estimates based on methodology that was employed before 1980. Many economists argue that this provides a comparison from apples to apples. to underlying inflation currently calculated by the BLS.