US stocks down 3.9%, closing in bear market as inflation fears mount
Treasury yields are rising at their highest rate in years as the Federal Reserve plans to hike interest rates sharply
Ibrahim Al-TarikMay 8, 2025
US stock markets ended Monday on a bearish note after a dramatic sell-off at the end of the session, while Treasury yields surged as persistently high inflation and the prospect of aggressive monetary tightening by central banks unsettled investors are.
Wall Street's S&P 500 stock index slipped 3.9 percent in New York, closing at its lowest level since January 2021, more than 20 percent below its all-time high of January 2022, a decline commonly dubbed a bear market becomes.
Government bond prices on both sides of the Atlantic also fell, sending yields to their highest levels in more than a decade as strong inflation readings prompted central banks in the US and Europe to raise interest rates after years of dovish policies.
The sharp selling was sparked by higher-than-expected inflation figures released last Friday, which showed US consumer prices rose 8.6 percent year-on-year in May as Russia's invasion of Ukraine pushed fuel and food costs into the country up.
Analysts have upgraded their forecasts for how much the US Federal Reserve will hike interest rates at its monetary policy meeting that ends Wednesday, amid speculation the central bank could make a particularly large hike of 0.75 percentage point.
Futures markets are now showing that investors expect the federal funds rate to hit 3.6 percent by the end of the year, compared to the current range of 0.75 to 1 percent. A week ago, investors were still assuming that the interest rate would only reach 2.9 percent this year.
"I think the Fed is going to really kick things up a notch on these latest [inflation] numbers, which will cause the economy to slow down," said Julian Howard, senior investment director for multi-asset solutions at fund manager GAM. “It's all looking pretty ugly in the short term, and there's really no way out other than investing in cash for now.
The expectation of higher interest rates has had a particularly strong impact on more speculative areas of the market, including fast-growing tech companies and cryptocurrencies The tech-heavy Nasdaq Composite ended down 4.7 percent, extending its losses to 31 percent for the
year.Bitcoin, the most widely held cryptocurrency, traded at less than $24,000 after falling 20 percent since last Friday The drop was exacerbated by news that two major players in the crypto market halted client withdrawals due to extreme market conditions.The
yield on the benchmark 10-year Treasury note, which underpins global borrowing costs, rose 0.21 percentage point 3.36 percent, the highest level since 2011. The Rend Treasuries rise when prices fall, and Monday's move was the sharpest one-day selloff in US benchmark bonds since March 2020.
The two-year Treasury yield, which reflects near-term interest rate expectations, rose 0.27 percentage points to 3.33 percent andNovember
The US investment bank Goldman Sachs raised its forecast for the Fed's monetary policy on Monday and expects interest rate hikes of 0.5 percentage points this week, as well as in July, September andfurther quarter point increases in December and January.
"It is very unlikely that the Fed will pivot to support financial markets unless there is a trend towards very significant economic disappointments," said Seema Shah, chief strategist at Principal Global Investors.
Barclays analysts had forecast a 0.75 percentage point hike this week. Standard Chartered's strategists said in a research note that they "wouldn't rule out" that outcome.
In Europe, the Stoxx 600 stock index fell 2.4 percent, posting its fifth straight decline. The regional stock index is down more than 9 percent this quarter.
The yield on 10-year German Bunds rose 0.12 percentage points to 1.63 percent, while the yield on 10-year Italian bonds rose 0.26 percentage points, the first time since 2014, the 4 percent mark. The yield on the Italian reference bond has more than quadrupled since mid-December. The European Central Bank last week paved the way for its first rate hike in more than a decade.
The dollar index, which tracks the US currency against a basket of equivalent currencies and tends to rise in times of uncertainty, rose 1.1 percent. Sterling fell particularly sharply, falling 1.5 percent against the dollar to $1.21.
Economists expect the Bank of England to hike its main refinancing rate by 0.25 percentage points on Thursday, with the likelihood of a 0.5 percentage point hike increasing, raising fears of stagflation.
Elsewhere, the yen hit a fresh 24-year low of ¥135.19 per dollar as traders bet the Bank of Japan would continue to buck the global trend towards higher interest rates. A FTSE index of Asian stocks outside Japan fell 2.8 percent.
