The Market Is Now Pricing In a 1% July Interest Rate Hike Following Red-Hot CPI Inflation Reading

Zinger Key Points
  • The projections come after the Labor Department reported a 9.1% increase in the consumer price index on Wednesday.
  • If the Fed opts for a 1% rate hike this month, it will be the largest interest rate hike in decades.

The U.S. Federal Reserve raised its target Fed funds rate by 0.75% in June, its first interest rate hike of that size since 1994.

With this month's Federal Open Market Committee meeting just around the corner, the bond market is now anticipating a greater than 50/50 chance the Fed will ramp up its tightening even further with a 1% interest rate hike in July.

On Wednesday morning, the Labor Department reported the consumer price index (CPI) gained 9.1% in June, the highest inflation reading since 1981. In response to the red-hot inflation number, the bond market is now pricing in a 51.1% chance of a 1% rate hike this month, according to CME Group. Just 24 hours ago, the market was pricing in only a 7.6% chance of a 1% rate hike.

Related Link: US Dollar Reaches Parity With Euro: Why A Strong Dollar Is Bad News For These Stocks

Cliff Hodge, chief investment officer for Cornerstone Wealth, said there's no way to sugar coat the "ugly" CPI reading. "Most were expecting a hot headline reading due to food and energy, which we got, but the most disappointing aspect was the uptick in core prices month over month. The Fed has no choice but to follow through on a more aggressive path, which raises the probability of recession next year," Hodge said.

Related Link: US Economy Adds 372,000 Jobs In June, Another 0.75% Fed Rate Hike 'Almost A Certainty'

If the Fed opts for a 1% rate hike this month, it will be the largest interest rate hike in more than 30 years.

More Rate Hikes Coming: The bond market is also pricing in a much more aggressive path for interest rates through the end of the year following the CPI reading.

The market is now pricing in a 71% chance the fed funds target rate range will be 3.5% to 3.75% or higher by the end of 2023. Only 24 hours ago, those chances were just 45.8%.

John Lynch, chief investment officer for Comerica Wealth Management, said Thursday that the Fed is now in a position where it can't afford to pause its tightening, even if the U.S. economy slips into a recession.

"We look for further market volatility as investors digest the combination of slowing growth, persistent inflation, and the likelihood that second quarter earnings season results in downward revisions for margins and profits," Lynch said. "In further market duress, we suspect the S&P 500 Index could test the 3,500 range before stabilizing."

Benzinga’s Take: Rising interest rates are certainly no cause for investors to panic and dump all their long-term stock holdings just because there may be more volatility in the SPDR S&P 500 ETF Trust SPY in coming weeks. Yet, investors might consider holding an elevated level of cash for the time being to allow for investing flexibility if the Fed triggers an even steeper sell-off in stocks.

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Posted In: Analyst ColorNewsEcon #sAnalyst RatingsCliff HodgeComerica Wealth ManagementCornerstone WealthJohn Lynch