Bears are in play amid rising bets on more aggressive tightening

Almost all the major sectors of the S&P 500 began the week down, with only about 10 components in positive territory. Monday saw a broad drop in US equities, with the S&P 500 confirming it is in a bear market.

Throughout this year, the markets have been under pressure as rising prices, including a spike in oil prices, caused partly by the war in Ukraine, have prompted the Federal Reserve to take robust measures to tighten monetary policy, such as raising interest rates and cutting its balance sheet. Fed watch Tool data from CME shows that expectations for 75 basis points at the June meeting rose from 30% early Monday to 96% late Monday. The Fed meeting will be held on Wednesday, and investors are highly expecting to get more clues about the economy's outlook.

There was also a short-lived inversion of the US Treasury yield curve for the first time since April, considered a reliable indication that a recession may be coming in the near future. The prospect of further Federal Reserve rate hikes in the coming months has led to a sharp increase in the yield on the 2-year Treasury note, which now stands at 3.3091%, passing the 10-year yield at 3.3050%. 

According to a commonly used definition, a bear market began on Jan. 3. It is now down more than 20% from its most recent record high, with the benchmark S&P index falling for four straight days. 

In keeping with the US dollar's recent surge, the dollar index, which previously broke out of a 5-year triangle earlier this year at 102.30, seems to be on a march again towards the mid-May peak at around 105. 

Events of today

Tuesday's data showed another decline in UK claimant numbers of 19,700 in May. Still, April's average earnings (including bonuses) rose 6.8%, illustrating the central bank's dilemma ahead of its meeting on Thursday. In light of this and Monday's decline in April GDP, it appears the BoE will struggle to contain inflation without pushing the economy into a slowdown.

Other data for release Tuesday includes Eurozone industrial production data for April and Germany's ZEW economic sentiment index for June. 

Several key releases are coming out of Australia this week. NAB Business Confidence was released on Tuesday, and the indicator slowed to 6 points in May, down from 10 in April.

This could mean further losses for the Australian dollar if economic data continues to deteriorate. Next up will be the Westpac Consumer Sentiment report on Wednesday and the May employment report on Thursday.