What’s driving markets

Investors have been focusing on the surge in inflation which has led the Federal Reserve and other central banks to raise interest rates, as well as on the war in Ukraine that has crippled grain exports and triggered sanctions on energy exporter Russia.

“The risks of a recession are rising, while achieving a soft landing for the U.S. economy appears increasingly challenging,” said Mark Haefele, chief investment officer for global wealth management at UBS.

Haefele said UBS reduced its earnings estimate for S&P 500 index companies for next year by 2% and cut its estimate of forward price-to-earnings to 16.6 from 17.9.

The latest update of Fed policy maker forecasts released last week, known as the dot plot, sees an additional 175 basis points of rate hikes, taking the Fed funds rate to 3.8%, over the next 18 months which would likely push the unemployment rate up from 3.6% to 4.1%, said Seema Shah, chief global strategist at Principal Global Investors, in a note.

Principal sees policy rates rising to 4.25% by mid-2023. This additional tightening could see unemployment rising above the Fed’s forecast, further raising the odds of recession, Shah said.

“Global central banks have clearly asserted that price stability sits above economic growth in their priority list, triggering major market upheaval. Against this painful backdrop, it becomes particularly important for investors to shift their equity and fixed income exposures towards quality and stability, while increasing their allocation to real assets, such as infrastructure and commodities, which still have some runway for potential outperformance,” she wrote.

Related: Fed looks ‘dead set’ on tightening financial conditions until the economy slows, warns BlackRock

Meanwhile, President Joe Biden said Monday that he will decide by the end of the week whether to order a holiday on the federal gasoline tax, as he also said a U.S. recession was not inevitable. Biden spoke with former U.S. Treasury Secretary Larry Summers, who said the jobless rate needs to spike to lower inflation.

A brutal selloff for crypto assets relented over the weekend, with the price of bitcoin
BTCUSD,
+3.34%
up 2.1% near $21,100 after dipping below the $18,000 threshold for the first time since December 2020.

In U.S. economic data, existing-home sales fell 3.4% to a seasonally adjusted annual rate of 5.41 million in May, the National Association of Realtors said Tuesday. Compared with May 2021, home sales were down 8.6%. The decline was in line with the forecast of economists polled by the Wall Street Journal.

Looking ahead, investors are expecting to hear more from Fed President Jerome Powell when he testifies before the Senate Banking Committee on Wednesday.

Overall, it was a strong session for both value and growth stocks as investors witnessed risk assets bouncing back. Tuesday marked the first time since May that both S&P 500 Value and S&P 500 Growth indexes gained more than 2% on the same day, and only the third time since 2020 that both indexes rallied as much, according to Dow Jones Market Data.

Companies in focus

Shares of Kellogg Co.
K,
+2.69%
rose 2.9% after the food company announced a plan to split into three businesses.

Lennar Corp.
LEN,
+2.24%
shares were up 4.5% after the homebuilder reported fiscal second-quarter profit, revenue and new orders that beat expectations, with gross margins improving despite higher materials and wage costs.

JetBlue Airways Corp.
JBLU,
-0.89%
continued its quest to buy Spirit Airlines Inc.
SAVE,
+8.06%,
increasing its offer and strengthening its commitment to divest itself of assets to get regulatory approval for the deal. JetBlue increased its offer to $33.50 in cash per Spirit share, up from a previous offer of $31.50. Spirit is considering whether to proceed with a planned acquisition by Frontier Group Holdings Inc.
ULCC,
+2.57%
ULCC or to accept JetBlue’s offer. Spirit shares rose 8.6%, while JetBlue shares were up 0.6% and Frontier shares gained 3.6%.

Tesla shares
TSLA,
+11.74%
leapt 12% higher as Tesla CEO Elon Musk announced job cuts.

Other assets

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.300%
rose 6.6 basis points to 3.300%. Yields and debt prices move opposite each other.

The ICE U.S. Dollar Index
DXY,
-0.23%,
a measure of the currency against a basket of six major rivals, was off 0.3%.

Oil futures bounced after the U.S. benchmark on Friday snapped a string of seven straight weekly gains. West Texas Intermediate crude
CL.1,
+0.93%
was up 1.7% near $111.40 a barrel.

Gold futures
GC00,
-0.36%
edged down 0.3% to trade below $1,840 an ounce.

The Stoxx Europe 600
SXXP,
+0.35%
and London’s FTSE 100
UKX,
+0.42%
each rose 0.4%.

The Shanghai Composite
SHCOMP,
-0.26%
fell 0.3%, while the Hang Seng Index
HSI,
+1.87%
rose 1.9% in Hong Kong and Japan’s Nikkei 225
NIK,
+1.84%
gained 1.8%.