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Stocks fall in preamble to U.S. inflation report as Treasuries further invert sounding recession alarm

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Treasury curve inversion deepens to levels last seen in 2007 amid fears that rate hikes will sink the economy

Stocks dropped ahead of June’s U.S. inflation report, with the Treasury curve inversion deepening to levels last seen in 2007 amid fears that rate hikes will sink the economy into a recession.
The S&P 500 extended losses into a third day as megacap tech sold off and energy shares joined a plunge in oil. The yield on the 10-year U.S. note dropped as much as 12 basis points below the two-year rate. So-called inversions of the curve are a potential harbinger of an economic contraction.

Economists say inflation continued to heat up in June, hitting a pandemic peak that will keep the Federal Reserve geared for another big hike. The consumer price index due Wednesday likely rose 8.8 per cent from a year earlier — the largest jump since 1981, according to the median forecast in a Bloomberg survey.

“The market is showing nervousness as to what this is going to look like,” said Patrick Kaser, portfolio manager at Brandywine Global. “There’s been talk about commodity prices coming down, but we’re not really seeing that flow through yet. We’re still expecting this number to come in pretty high.”
Traders also kept a close eye on the U.S. dollar, which fluctuated after hitting the highest since the COVID-19 panic of March 2020. For now, a wall of derivatives bets is keeping the euro from reaching parity with the greenback for the first time in two decades.
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The impacts of the U.S. currency surge will also be highly scrutinized during the earnings season. PepsiCo Inc., one of the first major industry players to report second-quarter results, said demand remained robust despite inflation — but highlighted foreign-exchange translation headwinds.

In other corporate news, American Airlines Group Inc. surged as the carrier stuck with its expectation for a jump in second-quarter sales, highlighting the strength of travel demand. Inc.’s Prime Day sale is luring bargain hunters looking to stock up on pantry items and cheap electronics despite a dearth of deals.

Trading revenue at the five biggest Wall Street banks likely climbed 16 per cent to US$27.8 billion in the second quarter, according to analyst estimates compiled by Bloomberg. That surge would come as a result of market swings spurred by recession fears, soaring inflation and global turmoil.

Sam Zell, the billionaire made famous by his real-estate deals, said that central bank actions to flood the market with money in recent years are coming back to bite the economy. He urged U.S. Federal Reserve chairman Jerome Powell to raise rates by as much as 75 basis points and “break the inflation mentality.”

“The Fed and other central banks are still very focused on bringing back actual inflation, but every other indicator we have of inflation is showing that this should not be our primary concern anymore, and we should be more concerned about slowing growth,” said Brian Nick, chief investment strategist at Nuveen.

Elsewhere, Bitcoin fell back below US$20,000, following last week’s rally.

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