Stocks fell, bond markets came under pressure and the dollar rose higher on Thursday as runaway inflation in the world’s largest economy fueled expectations of a bigger interest rate hike in the USA.
Wall Street’s S&P 500 slipped 0.9%, extending losses from the previous session. The tech-heavy Nasdaq Composite fell 0.8%. In Europe, the regional Stoxx 600 closed down 1.5%.
U.S. consumer prices rose to their fastest level in 40 years last month, according to a Bureau of Labor Statistics report released Wednesday, with the annual inflation rate beating economists’ forecasts to hit 9, 1%.
“The reaction [from stocks] was pretty low key yesterday,” said Ross Mayfield, investment strategy analyst at Baird, “but given time to digest it all, you see the sell off today.”
The data fueled expectations of a much larger interest rate hike from the US Federal Reserve at its meeting in late July. Futures markets are now almost fully pricing in a one percentage point increase from the Fed this month, after raising borrowing costs by 0.75 percentage points in June – the most since 1994.
These heightened expectations have, in turn, intensified fears of an economic slowdown compounded by higher borrowing costs. The Fed’s benchmark interest rate, currently hovering in a range of 1.50-1.75%, is now expected to hit over 3.6% in early 2023, against expectations of around 3, 5% at the start of the week.
“It’s not just about inflation,” said Salman Ahmed, global head of macro and strategic allocation at Fidelity International. “There is a significant slowdown in the pipeline. We believe that this slowdown in growth will turn into a recession.
Signaling fears of an economic slowdown hitting demand, the price of Brent crude fell 5.1% to $94.50 a barrel, driving the international oil benchmark back to levels not seen before Ukraine’s invasion of Ukraine. Russia at the end of February. Brent then cut some of his declines.
The prospect of more aggressive monetary policy tightening by the Fed also put pressure on government bonds. The yield on the 10-year US Treasury rose 0.06 percentage points to 2.97%. The two-year yield, which closely tracks interest rate expectations, fell 0.01 percentage point to 3.13%. Bond yields rise as their prices fall.
The moves meant the so-called Treasury yield curve remained near its most inverted level in more than 20 years, a scenario that historically preceded recession in the world’s largest economy. Eurozone government debt was also hit, with the yield on German two-year bonds adding 0.04 percentage points to 0.49%.
Concerns about the health of the global economy pushed investors towards the dollar, traditionally seen as a safe haven in times of crisis. The dollar index, which measures the US currency against a basket of six others, rose 0.5%.
This further affected the euro, which fell 0.3% to trade just above $1. The common currency had weakened on Wednesday to parity with the greenback for the first time in 20 years. The Japanese yen also lost more than 1% to hit a 24-year low at ¥139.39.