Premarket stocks: A truly massive interest rate hike is now on the table

What’s happening: Investors see a growing probability that the Federal Reserve could hike interest rates by a full percentage point at its next meeting for the first time in the modern era. In June, the Fed raised interest rates by three-quarters of a percentage point, which it hadn’t done since 1994.

US stocks mostly shrugged at the news on Wednesday that consumer prices jumped 9.1% year-over-year in June, a fresh 40-year high and a larger increase than forecast. But policymakers indicated deep concern.

Previously, Fed officials had expressed worries about the consequences of a hike of that magnitude.

“I think the markets would have a heart attack,” Fed Governor Christopher Waller said last month.
Yet traders see such an extraordinary increase as more and more likely. Markets on Thursday assigned it an 81% probability, according to data from CME Group.

Breaking it down: Short-term, the inflation picture is undeniably nasty, putting pressure on central bankers to get the situation under control quickly.

“I saw that data and thought: This wasn’t good news,” Mary Daly, president of the Federal Reserve Bank of San Francisco, told the New York Times on Wednesday — though she added she hadn’t been optimistic.

Much of the June increase was driven by a jump in gasoline prices, which were up nearly 60% over the year. But inflation concerns have moved beyond energy. The shelter index climbed 5.6% over the last year (more on that below). The price of household furnishings jumped 9.5% during the same period, while airline fares leaped more than 34%.

For guidance on what comes next, look to America’s northern neighbor. The Bank of Canada increased its main interest rate by a full percentage point on Wednesday, noting that inflation in the country was “higher and more persistent” than the central bank thought in early spring.

Other policymakers are in action, too. South Korea and New Zealand raised rates yesterday, while Singapore’s monetary authority and the central bank of the Philippines made emergency decisions to tighten policy earlier Thursday.

“Clearly, given other central banks are acknowledging the need to step up, the Fed isn’t alone anymore,” James Knightley, ING’s chief international economist, told me. That gives it “more cover to go more aggressively.”

Knightley still predicts a hike of three-quarters of a percentage point later this month, given concerns among many Fed officials about pushing the United States into a recession. But a full point increase is “certainly on the table” due to the recent batch of inflation data, he noted.

Housing costs are making inflation much worse

Yesterday’s edition of Before the Bell focused on the more hopeful case that inflation could come down in the medium-term. Today, after sorting through the data in the Consumer Price Index, I wanted to dig deeper into one of the strongest counterpoints: the cost of shelter.

The shelter component of the CPI continued to rise sharply in June, logging its biggest annual increase since February 1991.

That’s concerning to economists because rising housing costs are sticky. Food and gas prices can change quickly. But people are locked into rent for 12 to 24 months when they sign a lease.

Watch this space: The average monthly rent in Manhattan topped $5,000 a month in June for the first time ever, according to a report from brokerage firm Douglas Elliman and Miller Samuel Real Estate Appraisers and Consultants. That’s up nearly 30% from a year ago.

Housing represents about a third of the value of the basket of goods and services that the US Bureau of Labor Statistics uses to track consumer prices, making its trajectory especially important.

Remember: The Federal Reserve Bank of San Francisco wrote in February that rents and home prices can push up the Consumer Price Index “for as long as 24 months into the future.”

That complicates “peak inflation” hopes, even as oil prices drop and consumers put their faith in the Fed’s ability to do its job effectively.

The crypto bankruptcies keep coming

When I’ve spoken to backers of digital currencies recently, many have put a positive spin on the deep “crypto winter” that’s set in.

Their pitch: As prices plunge and turmoil spreads across the market for cryptocurrencies, weaker or dubious projects will fail. Only solid businesses will reach the next chapter, establishing a stronger foundation.

Even if you subscribe to that logic, however, the interim period promises to be messy.

Celsius became the latest firm in the industry to file for bankruptcy on Wednesday. The crypto lender, which has 1.7 million users, froze withdrawals and transfers last month, citing “extreme market conditions.”

Another crypto lender, Voyager Digital, filed for bankruptcy last week. It said the “prolonged volatility and contagion in the crypto markets over the past few months,” as well as the default of a customer on a loan, required “deliberate and decisive action.”

Investor insight: There are likely to be more casualties in the coming months. Bitcoin is languishing below $20,000 as fear continues to dominate investor sentiment, squeezing those who made risky bets when prices were much higher. The digital coin is off more than 70% from its November peak. Ether is roughly 78% below its all-time high.

Up next

Conagra, Ericsson, JPMorgan Chase and Morgan Stanley report results before US markets open. American Outdoor Brands follows after the close.

Also today: The US Producer Price Index, another key measure of inflation, arrives at 8:30 a.m. ET.

Coming tomorrow: Earnings from BlackRock, Citigroup, BNY Mellon and Wells Fargo.

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