The sell-off around the world is increasingly showing signs of a weakening global economy as central banks ramp up further pressure with further rate hikes. The Dow The Jones Industrial Average closed at its lowest level of the year on Friday. The S&P 500 index fell 1.7%, close to its 2022 low. Energy prices also closed sharply lower as traders worried about a possible recession. Treasury yields, which affect interest rates on mortgages and other types of loans, held at their highest levels in years.
European stocks fell sharply or more after preliminary data showed business activity posted its worst monthly decline since early 2021. Adding to the pressure was a new plan announced in London. . tax cutthis has sent UK yields soaring as it could eventually force its central bank to hike rates even further.
The Federal Reserve and other central banks around the world raised interest rates aggressively this week in hopes of easing high inflation, with more big hikes promised in the future. However, such moves also put their economies on hold, threatening a recession as growth slows around the world. In addition to Friday’s disappointing European business data, a separate report showed that US activity was also shrinking, though not as badly as in previous months.
Douglas Porter, chief economist at BMO Capital Markets, wrote in a research note: “Financial markets are now fully receptive to the Fed’s harsh message that there is no retreat from the inflation war.
Crude oil prices fell to their lowest levels since the start of the year on concerns that a weaker global economy will burn less fuel. Cryptocurrency prices also plummeted as higher interest rates tend to hit the investments that seem the most expensive or riskiest.
Even gold has fallen in the worldwide trend, as higher-yielding bonds make zero-interest investments look less attractive. Meanwhile The US dollar has risen sharply against other currencies. That could hurt the profits of US companies that do a lot of business abroad, as well as put financial pressure on much of the developing world.
The Dow Jones Industrial Average fell 505 points, or 1.7%, to 29,572 and Nasdaq down 1.9% at 3:43 p.m. Eastern time. Shares of smaller companies are even worse. Russell 2000 fell 3%. US crude oil prices fell 5.7% and weighed on energy stocks.
More than 90% of stocks in the S&P 500 are in the red, with technology companies, retailers and banks among the biggest weights in the benchmark index. The major indexes are on track for their fifth weekly decline in six weeks.
The Federal Reserve on Wednesday raised its benchmark interest rate, which affects many consumer and business loans, to a range of 3% to 3.25%. It was almost zero at the beginning of the year. The Fed also released a forecast suggesting its benchmark interest rate could be 4.4% by the end of the year, one point higher than expected in June.
Treasury yields rose to multi-year highs as interest rates rose. Yields on 2-year Treasuries, which tend to follow expectations of Federal Reserve action, rose to 4.19% from 4.12% late Thursday. It is trading at its highest level since 2007. The yield on 10-year Treasuries, which affects mortgage rates, has fallen from 3.71% to 3.68%.
Higher rate means Goldman Sachs Strategists say most of their clients now see a “hard landing” that drags the economy down sharply. The question for them is only about the duration, magnitude and length of a potential recession.
Higher interest rates hurt all types of investments, but stocks can stay stable as long as corporate profits grow strongly. The problem is that many analysts are starting to cut their forecasts for upcoming earnings because of higher rates and worries about a possible recession.
“Market sentiment has increasingly shifted from concern about inflation to worry that, at a minimum, corporate profits will decline as business growth grows,” said Quincy Krosby, chief global strategist at LPL Financial. economy slows demand”.
In the US, the job market has remained remarkably stable and many analysts see the economy growing in the summer quarter after contracting in the first six months of the year. But encouraging signs also suggest that the Fed may have to raise rates even higher to get the cooling needed to bring down inflation.
Several key sectors of the economy are weakening. Mortgage rates hit a 14-year high, causing sales of existing homes to drop 20% over the past year. But other areas that perform best when rates are low are also taking a hit.
Meanwhile, in Europe, the already fragile economy is dealing with the effects of war on the eastern front following Russia’s invasion of Ukraine. The European Central Bank is raising its key interest rate to fight inflation even as the region’s economy is forecast to slip into recession. And in Asia, the Chinese economy is facing still stringent measures to limit the spread of COVID that also hurt businesses.
While Friday’s economic reports were disheartening, a handful on Wall Street viewed them as enough to convince the Fed and other central banks to soften their stance on rate hikes. So they only reinforce fears that rates will continue to rise in the face of already slowing economies.
— Economics writer Christopher Rugaber and business writers Joe McDonald and Matt Ott contributed to this report.
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