By Lewis Krauskopf

NEW YORK (Reuters) -A surprisingly hot inflation report for June is complicating the outlook for markets, as investors brace for more hawkishness from the Federal Reserve and continued volatility in stocks and bonds.

Wall Street met the number, which showed consumer prices rising by a greater-than-expected 9.1% in June, with a collective groan. Analysts at Wells Fargo called the report “rotten to the core” while BofA Global Research strategists said it confirmed their recent call for a mild U.S. recession.

Federal funds futures, which reflect traders' bets on monetary policy, recently showed a 70% chance of a supersized 100 basis points rise at the coming meeting, compared with a roughly one-in-nine chance before the report, according to data from the CME Group.

"It's most likely we're going to have a recession because the Fed is going to have to act aggressively," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“Unfortunately we were looking for good news and this is not good news,” he said.

The report fueled sharp swings in stocks, with the benchmark S&P 500 index falling as much as 1.6% before climbing into positive territory. It ended down 0.45% for the day and is off more than 20% this year.

Recession worries have grown over the last few weeks, with several Wall Street banks calling for an increased chance of an economic downturn brought on by a hawkish, inflation-fighting Fed. The International Monetary Fund on Tuesday warned that avoiding recession in the United States will be "increasingly challenging" as it again cut its 2022 U.S. growth forecast.

The inversion on the U.S. two-year/10-year yield curve accelerated on Wednesday to as much as 24.20 basis points, the most inverted in nearly 22 years, Refinitiv data showed, once again flashing a signal that has preceded past recessions.

Following the inflation data, traders of futures tied to the Fed's policy rate swiftly priced in a higher probability of a 100-basis-point rise at the July 26-27 meeting. Central bankers over the past couple of weeks have already signaled support for a 75 basis point rate increase.

Wells Fargo’s analysts noted that the upside surprise can be tied mostly to greater strength in core inflation, which strips away volatile food and energy prices. That could help set the stage for the Fed to hike even more than 75 basis points in July, they wrote on Wednesday.

“To be clear, a 100 bps rate hike is not our base case at present, but yet another surprisingly strong CPI report cracks the door to such a move should the FOMC decide to bang that door wide open,” the Wells analysts said in a note.

The hawkish outlook for the Fed compared to many other global central banks also rippled through currency markets, with the dollar surging to a 20-year high against a basket of currencies while the euro broke below parity against the greenback.

The Bank of Canada on Wednesday raised its main interest rate by 100 basis points in a bid to crush inflation, surprising markets and becoming the first G7 country to make such an aggressive hike in this economic cycle.

Some analysts said inflation could start to cool in the coming months, noting a recent drop in commodity prices.

Peter Cardillo, chief market economist at Spartan Capital Securities, said "the numbers are ugly" but added that "the hints that inflation might be beginning to decelerate are there.”

Investors are now turning to second-quarter earnings season, which is just starting, to reinvigorate the market.

S&P 500 earnings are expected to have climbed 5.7% from the year-ago period, but investors are skeptical companies will be able to achieve those estimates given the uncertain economic outlook, including high inflation that is raising costs for both consumers and businesses.

"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," John Lynch, chief investment officer at Comerica Wealth Management, said in emailed comments.

(Reporting by Lewis Krauskopf, Sinéad Carew, Herbert Lash, and Stephen Culp; Editing by Ira Iosebashvili, Chizu Nomiyama and Jonathan Oatis)