Stocks fell, government bonds sold off and the dollar edged higher on Thursday, as sweltering inflation in the world’s largest economy boosted expectations of larger US interest rate hikes.
Wall Street’s S&P 500 stock index fell 1.8 percent at the open, extending Wednesday’s 0.5 percent loss. The tech-heavy Nasdaq Composite fell 1.7%. Europe’s Stoxx 600 is down 1.5%, bringing its losses to date close to 17%.
Last month, U.S. consumer prices rose by the most in 40 years, a report from the Bureau of Labor Statistics showed on Wednesday, with the annual inflation rate topping economists’ forecasts of 9 percent. ,first%.
Those data boost expectations of a much larger rate hike from the US Federal Reserve when it meets at the end of July. Futures markets are now pricing in the possibility of a 1 percentage point increase in the Fed, after it raised borrowing costs by 0.75 percentage points in June – the highest level since 1994.
Salman Ahmed, global head of strategic and macro allocation at Fidelity International, said a 0.75 percentage point gain “looks very likely” but added that the market is continuing to price in. the peak rate is 3.5%, with the Fed simply “forward-loading spikes”.
“This is not just about inflation,” Ahmed said. “There is a significant slowdown in the pipeline. We expect this growth downturn to turn into a recession.”
The Fed’s current target range for its benchmark policy rate is 1.50-1.75%.
Thursday’s earnings report adds to the gloom. Jamie Dimon, chief executive of JPMorgan, warns of threats to global economic growth from “unprecedented” tightening from central banks, inflation, weak consumer confidence and geopolitical challenges, as the bank missed its profit expectations for the second quarter of 2022. Morgan Stanley also miss expectations on Thursday.
Georgina Taylor, a multi-asset fund manager at Invesco, noted that the market is “more sensitive” to earnings disappointments. “There is the potential for an asymmetrical response to bad news at the moment: it could add fuel to the fire.”
The prospect of more aggressive monetary policy tightening by the Fed put pressure on government bonds, with yields on 10-year US Treasuries rising nearly 0.1 percentage point to 3 percent. The two-year yield, which closely tracks interest rate expectations, added 0.1 percentage point to 3.24%. Bond yields increase as their prices fall.
Those moves mean the so-called Treasury yield curve remains at its most inverted in more than 20 years, a scenario that has preceded recessions in the history of the world’s largest economy.
Eurozone government debt also sold off, with German two-year yields adding 0.10 percentage points to 0.54 percent and Italian equivalent yields up 0.31 percentage points to 1.54 percent. hundred, after Five Star Movement threatens to bring down Mario Draghi’s multi-party government.
Anticipation of higher US borrowing costs and the possibility of a global economic slowdown have investors flocking to the dollar, traditionally seen as a haven in times of stress. The dollar index, which measures the US currency against a basket of six other currencies, was up 1.2%.
That gain added pain to the euro, which fell 1.1% to trade just under $1. The common currency weakened on Wednesday to par with the greenback for the first time in 20 years.
The Japanese yen also lost more than 1% to hit a 24-year low of 139.39 yen as traders bet that the Bank of Japan will follow through with its extremely loose monetary policy, hitting marked an increasingly distinct difference from the strategies of other large banks. central banks as they try to slow down the rapid rate of price increases.
In commodities, Brent crude fell 4.4% to $95.23 a barrel – bringing the international oil benchmark back to levels last seen before Russia’s invasion of Ukraine in late February. Oil and other commodities have fallen in recent weeks after surging earlier this year, reflecting growing fears of a recession.
