(Bloomberg) – Stocks tumbled as data showing persistently high inflation bolstered speculation that the Federal Reserve will maintain tighter monetary policy for longer – even if authorities decide to slow the pace of increases next week, as recently reported.
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The S&P 500 pushed toward a weekly slide after a warmer-than-expected producer price reading. 10-year Treasury yields rose above 3.5% and the dollar fluctuated. Oil rose after President Vladimir Putin said Russia could cut production.
“With traders on edge, any indication that prices remain high and inflation is more rigid than currently believed is negative for markets,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “It is likely that the Fed will continue its plans to reduce the rate hike from 75 basis points per meeting to 50 basis points per meeting, but if there is any chance of a Santa Claus rally this year, it will depend on inflation next Tuesday’s data will be lower than expected.
On the eve of the Fed’s decision on Wednesday, all eyes will be on the consumer inflation numbers. US central bankers, including Chairman Jerome Powell, have signaled a slowing pace of rate hikes while stressing that borrowing costs will need to keep rising and remain tight for some time to beat inflation.
“The month-over-month PPI is up slightly and slightly above expectations is another reminder of the stickiness of inflation,” said Mike Loewengart of the Morgan Stanley Global Investment Office. “Although keep in mind compared to where we were a year ago, we are in a better position and we are heading in the right direction. Today’s warmer than expected report is unlikely is enough to push the Fed to stick with the 75 basis point hikes next week, but any negative news on the inflation front is a thorn in the side of the Fed and investors.
The Fed is poised to disappoint Wall Street by keeping rates at their peak through 2023, dashing hopes that markets priced in for second-half rate cuts and making a recession very likely. Officials will raise rates by 50 basis points next week, following four consecutive 75 basis point hikes, and by a quarter point at the following two meetings, according to the survey.
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While many investors are eagerly awaiting the Fed’s latest rate hike, history shows they should be wary of it as long as inflation remains high, according to strategists at Bank of America Corp.
Analysis by Michael Hartnett and his team showed that stocks outperformed after the Fed stopped raising rates during periods of disinflation over the past 30 years. However, during the high inflation era of the 1970s and 1980s, stocks had fallen after the last rise, they wrote in a note. In the current cycle, they expect the Fed to raise rates for the last time in March 2023.
The International Monetary Fund, World Bank and others have raised concerns about the deteriorating global outlook, while hoping China’s reopening will help support global growth. IMF Managing Director Kristalina Georgieva said indicators show further downgrades in global growth are likely. The institution currently forecasts that global growth will be 2.7% next year, compared to 3.2% this year.
Some of the world’s biggest investors are predicting equities to post low double-digit gains next year, which would bring relief after global equities suffered their worst loss since 2008.
Amid recent optimism that inflation has peaked — and the Fed may soon start to change its tune — 71% of respondents to a Bloomberg News survey expect stocks to rise, versus 19% predicting declines. For those seeing gains, the average response was a 10% return.
No borrowers are looking to sell new US investment-grade bonds on Friday, according to an informal survey of debt underwriters.
The market was eagerly awaiting data from the Producer Price Index, a key reading for inflation, which came in hotter than expected. It’s unclear whether a company that pulled out on Wednesday and Thursday will return for another look next week, but it looks like there aren’t many other deals in sight for the rest of December.
Some of the major movements in the markets:
The S&P 500 fell 0.2% at 9:53 a.m. PT
The Nasdaq 100 fell 0.4%
The Dow Jones Industrial Average fell 0.3%
The Stoxx Europe 600 rose 0.7%
The MSCI World index rose 0.2%
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.2% to $1.0535
The British pound rose 0.3% to $1.2268
The Japanese yen rose 0.2% to 136.36 per dollar
Bitcoin fell 0.2% to $17,155.15
Ether fell 0.5% to $1,271.68
The yield on 10-year Treasury bills rose five basis points to 3.53%
Germany’s 10-year yield rose nine basis points to 1.91%
The UK 10-year yield rose six basis points to 3.15%
West Texas Intermediate crude rose 1% to $72.21 a barrel
Gold futures rose 0.4% to $1,808.90 an ounce
This story was produced with assistance from Bloomberg Automation.
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