Stock Market Review |  The threat of inflation pushes markets lower

Stock Market Review | The threat of inflation pushes markets lower

(Toronto and New York) Stocks fell Thursday as investors refocused on the threat of runaway inflation and economic hardship that will result from rising interest rates to levels not seen in more than 10 years, resuming a move to the downside has already sent Wall Street into a bear market.

Updated yesterday at 23:10

Isabella Simonetti and Jason Karaian
The New York Times

The S&P 500 fell 3.3%, part of a global pullback that also saw European stocks post sharp falls. With Thursday’s drop, the S&P 500 is now nearly 24% below its Jan. 3 high and on track for its worst quarter since 2008, when the economy was devastated by a global financial crisis.


Europe’s Stoxx 600 index fell 2.5%, its seventh drop in eight days, and the same was true of London’s FTSE 100, which lost 3.1%.

Thursday’s drop came a day after the Federal Reserve (Fed) announced its biggest rate hike in decades, a sign it is ready to inflict some economic pain to rein in inflation while other central banks follow suit. . The Bank of England announced its fifth consecutive interest rate hike on Thursday, and Switzerland’s central bank raised its interest rate for the first time in 15 years, a move more aggressive than many expected.

Central banks are raising borrowing costs to discourage spending, whether on new homes or car loans, but the move is also slowing economic growth and threatening corporate profits.

Interest rates are rising rapidly along with the Federal Reserve’s key rate, which is now in a range of 1.5% to 1.75% from almost zero in March. Average mortgage rates have nearly doubled this year, rising from just over 3% to around 5.8% on Thursday. This is the highest level for 30-year fixed mortgages since 2008, according to Freddie Mac.

As a result, shares of homebuilders such as KB Home and Lennar fell. On Thursday they were down 8% and 6.5% respectively, losses that have seen them fall more than 40% since the beginning of the year.

And government bond yields, which support borrowing costs across the economy, are rising sharply this year as the central bank raises rates. On Thursday, the yield on 10-year Treasury bills was 3.2%, a level not seen in more than 10 years.

The Toronto Stock Exchange also falls

The S&P/TSX Composite Index on the floor of Toronto lost 607.50 points, or more than 3%, to end the session with 19,004.06 points. It is now down 24% compared to the beginning of the year.

“For me, it’s about the Federal Reserve,” said Allan Small, an analyst at IA Private Wealth Management.

Fears about the rising cost of borrowing and its knock-on effect, starting with the housing market, weigh on a variety of indices. Meanwhile, concerns continue to mount over whether the US central bank’s rate hikes will address problems caused, in large part, by factors largely outside its control, he said.

“At the end of the day, I don’t think the fact that the Fed is hiking so aggressively will do anything for inflation, at least not yet,” Small said. Hence the even greater pessimism about economic stability.


Recovery could be delayed

Analysts say the stock market is unlikely to recover until there are clear signs that inflation is starting to come under control, which would ease pressure on the Fed to quickly raise rates. Stocks rose briefly in late May, ending a seven-week losing streak when data appeared to show consumer price inflation had peaked, but selling resumed last week after a A new consumer price index report will show inflation picked up again, jumping 8.6% in May from a year earlier.

“Continuous inflation could kill the stock market,” said Edward Moya, senior market analyst at OANDA, noting that rising food, energy and housing prices are a burden on businesses and consumers. .

Fed Chairman Jerome Powell stressed at a news conference on Wednesday that causing a recession was not part of the central bank’s plan, but economists are skeptical.

Analysts at Deutsche Bank, for example, have said the central bank is “too optimistic” in believing it can control inflation without causing a recession.

“Until it is clear that the United States has experienced a spike in inflation, concerns about the path of the Fed’s hikes are likely to subside significantly,” Jane Foley, a strategist at Rabobank, wrote in an email. “Meanwhile, market sentiment is likely to remain subdued. »

Revisions to economic forecasts are coming in fast. Economists at IHS Markit, for example, now say that US gross domestic product probably grew at an annual rate of 0.8% in the second quarter. Just last week, they were forecasting 2.4% growth.

with the Canadian press

This article was originally published in the New York Times.


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