Stocks dropped before Wednesday’s inflation report, with the Treasury curve inversion deepening to levels last seen in 2007 amid fears that aggressive rate hikes will sink the economy into a recession.

The S&P 500 slid into the close as megacap tech sold off and energy shares joined a plunge in oil. The yield on the 10-year US 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 probably 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 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.

The impacts of the US 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 the current environment, dollar strength is a sign of investors’ worries about a global recession since it signals a flight to the relative safety of the world’s reserve currency,” wrote Nicholas Colas, co-founder of DataTrek Research. “Until the dollar starts to weaken, it is difficult to believe the lows are in for US equities in 2022.”

In other corporate news, American Airlines Group Inc. rallied as the carrier stuck with its expectation for a jump in second-quarter sales, highlighting the strength of travel demand. Amazon.com 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 Fed Chair 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.

What to watch this week:

• Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo
• New Zealand rate decision, Wednesday
• US CPI data, Wednesday
• Federal Reserve Beige Book, Wednesday
• 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 0.9 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1 per cent
• The Dow Jones Industrial Average fell 0.6 per cent
• The MSCI World index fell 0.8 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at US$1.0041
• The British pound was little changed at US$1.1894
• The Japanese yen rose 0.5 per cent to 136.80 per dollar

Bonds

• The yield on 10-year Treasuries declined three basis points to 2.96 per cent
• Germany’s 10-year yield declined 11 basis points to 1.13 per cent
• Britain’s 10-year yield declined 10 basis points to 2.07 per cent

Commodities

• West Texas Intermediate crude fell 8 per cent to US$95.80 a barrel
• Gold futures fell 0.4 per cent to US$1,724 an ounce