A NYSE sign is seen on the floor of the New York Stock Exchange in New York on Wednesday, February 22, 2023.Seth Little (`)
Stocks tumble on Wall Street on Friday as disheartening evidence mounts showing inflation is not cooling as quickly as hoped. The S&P 500 was down 1.2% in midday trade and was on track to post its third straight weekly loss, its worst since early December. The Dow Jones Industrial Average fell 338 points, or 1%, to 32,815 as of 11:45 a.m. Eastern time, while the Nasdaq Composite was 1.8% lower.
Stocks fell in February as a slew of reports showed that everything from inflation to jobs to buyer spending remained hotter than expected. That has forced Wall Street to raise its forecasts of how high the Federal Reserve will have to raise interest rates and how long they will stay there.
Higher interest rates can lower inflation, but they also increase the risk of a recession by slowing down the economy. They also hurt the prices of stocks and other assets. The latest reminder came on Friday after a report showed that the Fed’s preferred inflation measure came in higher than expected. Prices in January were 4.7% higher than a year earlier after ignoring food and energy costs as they can fluctuate faster than others. That was an acceleration from the December inflation rate, which showed the wrong momentum, and it was higher than economists’ expectations for 4.3%.
It echoed other reports from earlier in the month that showed January inflation was higher than expected at both the consumer and wholesale levels. Other data on Friday showed that consumer spending returned to growth in January, up 1.8% from December. This is crucial as consumer spending makes up the bulk of the economy. A separate measure of consumer sentiment came in slightly stronger than previously thought, while new home sales rose slightly more than expected.
This strength, coupled with the remarkably resilient labor market, gives hope that the economy can avoid a recession in the short term. But it can also put upward pressure on inflation, and Wall Street fears it could push the Fed to raise rates even higher and keep them there longer than it otherwise would.
“It puts the final nail in the coffin to the shift we’ve seen over the past few weeks, where the market has gotten to what the Fed has been saying for a while: rates above 5% and there for longer,” said Ross Mayfield, investment strategy analyst at Baird.
After earlier doubts that the Fed would eventually raise its federal funds rate as high as it announced and that it might even cut rates later this year, traders are increasing bets on the Fed’s interest rate going to at least 5. 25% up and will stay that high until the end of the year. It is currently in a range of 4.50% to 4.75% and was practically zero a year ago.
Higher interest rates increase the risk of a subsequent recession, even when the key part of the economy has been resilient. “The consumer is hanging on, but the consensus seems to be that shoppers are switching a lot to cheaper items,” Mayfield said. “If you look a year ahead and bet the consumer sector stays there, it’s going to get harder with each passing month.” He expects economic growth to fall below its long-term trend, if not into a small recession , although he doesn’t expect a worst downturn.
Expectations of a firmer Fed have seen yields soar in the Treasury market this month and continued to rise on Friday. The yield on the 10-year government bond rose to 3.95% from 3.89% late Thursday. It helps set interest rates on mortgages and other major loans. The two-year yield, which is moving closer to the Fed’s expectations, rose to 4.79% from 4.71%.
Tech and high-growth stocks were again under the most pressure. Investments that are seen as the most expensive, riskiest, or those that keep their investors waiting the longest for big growth are among the most vulnerable to higher interest rates. Apple, Microsoft, Amazon and Tesla all fell at least 1.8% and were the heaviest weights in the S&P 500 because their immense size gives them more leverage on the index. You belonged to a lot of society in the midst of Wall Street’s obliteration. About 85% of stocks in the S&P 500 fell.
Software company Autodesk had one of the biggest losses in the index, falling 11.1% despite reporting stronger-than-expected earnings and sales for the most recent quarter. Analysts said investors were disappointed with forecasts for upcoming results. Boeing shed 4.8% after it once again halted deliveries of its 787 passenger jet over questions about a supplier’s analysis near the front of the plane.
Equity markets overseas were also mostly down, with France’s main index down 1.1% and Hong Kong down 1.7%. Japan’s Nikkei 225 was an outlier, up 1.3%. The candidate for the country’s central bank governor, economist Kazuo Ueda, told lawmakers he prefers to keep Japan’s interest rate close to zero to ensure stable growth. That’s despite Japan reporting that its core consumer price index, excluding non-perishable fresh groceries, posted its sharpest rise in 41 years in January.
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