Stocks slid after data showed that US inflation will remain high for quite some time, adding to concern the Federal Reserve may be forced to unleash further tightening measures that could tip the economy into a recession.
Remarks from Fed Bank of Atlanta President Raphael Bostic didn’t help sentiment either as the official said he’s open to “moving more” on rates if inflation persists at elevated levels. The S&P 500 erased gains and dropped to its lowest since March 2021, while the tech-heavy Nasdaq 100 tumbled about 3% amid a rout in giants like Tesla Inc. and Apple Inc. Small caps sank after a rally that approached 2% earlier in the day. The Treasury curve flattened, with the gap between two- and 10-year yields narrowing nine basis points.
Investors seem to agree that a 75 basis-point hike isn’t likely, according to pricing in federal-fund futures markets. But they did increase bets that the Fed will roll out another half-point hike in September — following increases of that size in June and July. The US central bank hiked interest rates by a half-point last week and Fed Chair Jerome Powell signaled that similar rate increases are on the table for the next two meetings, while pushing back against making a larger move.
While annual measures of consumer prices cooled slightly from March — signaling a peak that economists expected — the details of a report Wednesday painted a more troubling picture as monthly figures advanced more than forecast. Services costs accelerated while inflation for most goods remained stubbornly high, underscoring the persistence and breadth of price pressures.
The rout in stocks isn’t over just yet, according to Morgan Stanley strategists, who see scope for equities to correct further amid mounting concerns of slowing growth. Strategist Michael Wilson, who has long been a skeptic of the decadelong bull run in US stocks, said in a note that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Fed tightening policy into slowing growth.
“We continue to believe that the US equity market is not priced for this slowdown in growth from current levels,” Wilson said in a note. “We expect equity volatility to remain elevated over the next 12 months.” He recommends defensive positioning with an overweight in health-care, utilities and real-estate shares.
The S&P 500 may be at risk of further downside toward 3,600 points — down 10% from the Tuesday close — before reaching a historically important technical support level. The 200-week moving average since 1986 has seen the US benchmark bounce back during all major bear markets, except for the tech bubble and the global financial crisis.
Here are key events to watch this week:
- San Francisco Fed President Mary Daly speaks, Thursday
- US PPI, initial jobless claims, Thursday
- University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
- The S&P 500 fell 1.6% as of 4 p.m. New York time
- The Nasdaq 100 fell 3.1%
- The Dow Jones Industrial Average fell 1%
- The MSCI World index fell 0.9%
- The Bloomberg Dollar Spot Index was little changed
- The euro fell 0.1% to $1.0516
- The British pound fell 0.6% to $1.2243
- The Japanese yen rose 0.4% to 129.95 per dollar
- The yield on 10-year Treasuries declined eight basis points to 2.91%
- Germany’s 10-year yield declined one basis point to 0.99%
- Britain’s 10-year yield declined two basis points to 1.83%
- West Texas Intermediate crude rose 5.4% to $105.13 a barrel
- Gold futures rose 0.6% to $1,852.50 an ounce
–With assistance from Sunil Jagtiani, Andreea Papuc, John Viljoen, Srinivasan Sivabalan, Peyton Forte, Michael Msika and Cecile Gutscher.