Stocks and Futures fall on Hawkish Post CPI Fed Views: Markets Wrap

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(Bloomberg). — Stocks and US equity forwards fell on Thursday, as Wall Street was hit by a hot US inflation report. Wall Street is now betting more aggressive Federal Reserve tightening of monetary policy and an economic downturn.

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An Asian share gauge dipped, led by Japan, while S&P 500 and Nasdaq 100 contracts shed about 0.5%. The volatile session in the USA ended with small losses. This resilience may have been rooted in speculation about whether the 9.1% consumer price reading is the peak.

Read more: Inflation is Awful, Stocks Survive – Parsing The Tepid Reaction

Traders began to expect a historic one percent-point Fed interest-rate rate increase later in the month. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures.

Loretta Mester, president of Fed Bank of Cleveland stated that the CPI data was all bad. She also said that the central bank would need to raise rates beyond the neutral level. The figures don’t suggest a smaller hike than in June, she added.

Two-year Treasury yields were more sensitive to Fed moves and climbed further, while longer-maturity rates remained steady. The potential recession indicator of inversions between the two-year and 10 year yields was at levels not seen since 2000.

The dollar gauge advanced, while commodity-linked currencies fell and the euro returned to $1. After briefly falling below that level on Wednesday, it rebounded. Following a 100 basis point hike by Bank of Canada, the loonie lost ground. Crude oil was hovering around $96 per barrel. Bitcoin rose past $20,000.

Markets are still unsure if the latest inflation report marks the peak. Commodity prices, pushed up this year in part by supply disruptions related to Russia’s war in Ukraine, have moderated somewhat of late.

However, higher costs could prove to be persistent in an economy that is buckling under rate increases. This could make it toxic for assets already suffering heavy losses this year.

“Stubbornly high inflation increases the risk that the FOMC continues to hike aggressively and triggers a recession,” Kristina Clifton, senior economist at Commonwealth Bank of Australia, wrote in a note. That’s increasingly the market’s base case and recession fears will continue to support the dollar, she added.

Swaps referencing Fed meetings are priced so that the policy rate will peak at around 3.7% this December. This is an increase from the current target range between 1.50% and1.75%. The Fed is expected to begin cutting rates with more than three quarters off a percentage point priced in between the peak and March 2024, according to traders.

The currency rose after the Singapore central bank abruptly increased its monetary policy. Meanwhile, a Chinese central bank official said liquidity in the interbank market is more than “reasonably ample,” a sign that further rate cuts are unlikely.

Traders are also monitoring any impact after US Securities and Exchange Commission Chair Gary Gensler cast doubt on the possibility of a deal being reached with China on access to Chinese companies’ audit reports.

What to Watch This Week:

  • Earnings from JPMorgan Chase, Morgan Stanley and Citigroup, Wells Fargo

  • US PPI, Jobless Claims, Thursday

  • China GDP, Friday

  • US business inventories, industrial output, University of Michigan consumer sentiments, Empire manufacturing, retail, Friday

  • G-20 central bankers and finance ministers meet in Bali starting Friday

  • Raphael Bostic, President of Atlanta Fed, speaks Friday

Can the eurozone avoid a recession? What is the performance of the stocks and euro in the next six-months? Take part in the latest MLIV Pulse poll and share your thoughts. It only takes one minute, so click here anonymously.

Here are some of the major moves on markets:

Stocks

  • S&P 500 futures slid 0.5% as of 9:28 a.m. in Tokyo. The S&P 500 fell 0.5%

  • Nasdaq 100 futures fell 0.6%. The Nasdaq 100 declined 0.1%

  • Japan’s Topix index was down 0.3%

  • South Korea’s Kospi index dropped 0.4%

  • Australia’s S&P/ASX 200 Index added 0.1%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.3%

  • The euro fell 0.3% at $1.0035

  • The Japanese yen fell 0.2% to 137.70 USD.

  • Offshore yuan prices were at 6.7324 dollars, down 0.1%

Bonds

Commodities

  • West Texas Intermediate crude oil fell 0.4% to $95.84 a barrel

  • Gold declined 0.4% to $1.729.29 per ounce

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