Shares of Wall Street fell sharply, and yields on short-term treasury bonds rose to 14-year highs after new evidence of hot inflation in the United States sparked fears in the market that the Federal Reserve would be forced to take aggressive monetary action to slowing economic growth.
The broad-based S&P 500 fell 2.7 percent, while the tech Nasdaq Composite, which is saturated with interest rate-sensitive rising stocks, fell 3.4 percent. Both indexes were on track for their worst daily performance since May 18th.
Yields on two-year government securities, which are moving with interest rate expectations, rose to 3%, their highest level since 2008, the last time it passed the psychologically significant level of 3%.
The profitability of the five-year treasury briefly surpassed the profitability of the 30-year, which shows that the market believes that the Fed’s campaign to raise interest rates could drive the US economy into recession.
The US government’s consumer price index report shows that annual inflation rose to 8.6% in May, above 8.3% in April, and exceeded economists’ forecasts as food, energy and housing prices rose. raised.
The Federal Reserve is expected to raise its key interest rate by another 0.5 percentage points at its policy meeting next week. At the Fed’s meeting in May, Jay Powell began a half-point increase in both June and July, but some questions remain as to whether the central bank will continue at this pace in September. Following Friday’s inflation data, the market rose completely by 0.5 percentage points in September.
The futures market now expects the Fed’s base rate to be 3.2% by the end of the year, a half-point increase for the Fed’s next four meetings – June, July, September and November – plus a quarter-point increase in December.
“The market believes that the Fed will have to tighten more and this increases the risk of recession,” said Brian Nick, chief investment strategist at Nuveen.
The European regional stock index Stoxx 600 fell 2.6% as concerns about the US outlook added to concerns about the effects of rising interest rates in the eurozone on financially weaker European countries.
US and European stocks also fell on Thursday as the European Central Bank rocked markets, setting out its own plans to tighten monetary policy.
The ECB, which has long been one of the world’s most accommodating central banks, signaled on Thursday that it could raise its key interest rate on deposits to above zero in September, its first deviation from negative interest rates in eight years. He also said he would end Member States’ net debt purchases, raising fears of financial stress for the bloc’s weaker economies.
“The message for the markets is that the priority now is to quell inflation, not growth,” said Paul O’Connor, head of Janus Henderson’s UK-based multiple assets team.
“The ECB’s hawk,” he added, “provided a major obstacle for global bulls, as it reinforces the idea that central banks will simply not stop fighting inflation.”
The FTSE index for shares of developed and emerging markets fell by more than 2.6%, putting it on track for the worst weekly decline since October 2020.
Germany’s 10-year government bond, which serves as a benchmark for interest rates on loans in the region, rose 0.07 percentage points to 1.5 percent, its highest level since 2014.
The yield on 10-year Italian bonds rose 0.15 percentage points to 3.74%, more than three times the level at the beginning of the year.
In Asia, Hong Kong’s Hang Seng index traded unchanged and Tokyo’s Nikkei 225 fell 1.5%. CSI 300 in mainland China rose 1.5%.
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