Stocks finished lower as a shockingly hot US inflation report rattled financial markets, boosting bets the Federal Reserve could get even more aggressive with its belt-tightening campaign.

Amid unnerving swings, the S&P 500 failed to hold gains after reversing a 1.6 per cent slide. Also weighing on sentiment were hawkish signals from Fed Bank of Atlanta President Raphael Bostic, who said “everything is in play” to combat price pressures. Swap markets shifted to price in a full-point hike as more likely than a 75-basis-point increase in July.

Treasury two-year yields, which are more sensitive to imminent Fed moves, climbed. The euro snapped back after briefly falling below US$1, while the loonie gained as the Bank of Canada raised rates by a 100 basis points. Bitcoin rose amid a revival of its inflation-hedge appeal.

The biggest surge in US consumer prices since 1981 showed that an inflation peak may still be out of reach. The Fed will likely resort to hawkish rhetoric and further front-loading of tightening as it fights to maintain its credibility, according to Federated Hermes’ Silvia Dall’Angelo.

“The June CPI print is ugly across the board,” wrote Krishna Guha, vice chairman at Evercore ISI. “This is bad news for risk assets as it increases the likelihood that the Fed will keep raising rates rapidly and end up overshooting by enough to push the economy into recession.”

Bank of America Corp. economists forecast a “mild recession this year” in the US, saying services spending is slowing and hot inflation is spurring consumers to pull back. They join Wells Fargo Investment Institute and Nomura Holdings Inc. in expecting a contraction in 2022. Deutsche Bank AG sees one starting in mid-2023.

More comments:

• “Clearly, we’re not out of the inflation woods yet,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley. “We’re likely in for a bumpy ride in the market.”
• “The June CPI release was an ugly print, no getting around it,” said Cliff Hodge, chief investment officer at Cornerstone Financial. “The Fed has no choice but to follow through on a more aggressive path, which raises the probability of recession next year.”
• “The only option available to the Fed is to slow economic growth enough to bring domestic demand down to meet constrained supply -- possibly tipping the US into recession,” said Richard Flynn, managing director of Charles Schwab UK.
• “Inflation keeps heating up, defying expectations for a peak to be reached,” said Seema Shah, chief global strategist at Principal Global Investors. “We see rates moving to 4.25 per cent next year as the Fed desperately attempts to recover from its earlier erroneous inflation read.”

The multi-year market mantra of TINA -- there is no alternative to equities -- is facing a major threat as bond yields are looking more attractive. The percentage of S&P 500 members with a dividend yield higher than the 10-year US Treasury rate has fallen to the lowest since 2007. Payouts are under pressure as companies grapple with fears of recession, historically high inflation and supply constraints.

In corporate news, Delta Air Lines Inc. fell short of profit expectations in the second quarter and said high operating costs will persist through the rest of the year. Spirit Airlines Inc. agreed to delay a planned shareholder vote yet again on a proposed acquisition by Frontier Group Holdings Inc.

Investors fixated on the looming risk of recession are about to get a crucial read on a question that’s been burning a hole through markets for months: whether bank earnings will show cracks forming in the economy. Net interest income for the six largest US lenders is expected to rise by roughly 15 per cent, while at the same time mortgage and investment-banking revenue is projected to decline, according to data compiled by Bloomberg.

What to watch this week:

• Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo
• US PPI, jobless claims, Thursday
• China GDP, Friday
• US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday
• G-20 finance ministers, central bankers meet in Bali, from Friday
• Atlanta Fed President Raphael Bostic speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.1 per cent
• The Dow Jones Industrial Average fell 0.7 per cent
• The MSCI World index fell 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.2 per cent to US$1.0060
• The British pound was little changed at US$1.1895
• The Japanese yen fell 0.3 per cent to 137.32 per dollar

Bonds

• The yield on 10-year Treasuries declined six basis points to 2.91 per cent
• Germany’s 10-year yield advanced one basis point to 1.15 per cent
• Britain’s 10-year yield declined one basis point to 2.06 per cent

Commodities

• West Texas Intermediate crude was little changed
• Gold futures rose 0.4 per cent to US$1,731.10 an ounce