Stocks slumped after a hotter-than-estimated inflation reading bolstered the case for the Federal Reserve to keep rates higher for longer, which could make the odds of a soft landing look slimmer.
(Bloomberg) — Stocks slumped after a hotter-than-estimated inflation reading bolstered the case for the Federal Reserve to keep rates higher for longer, which could make the odds of a soft landing look slimmer.
A slide in the S&P 500 added to its worst weekly selloff since early December. The tech-heavy Nasdaq 100 tumbled about 2% as the Treasury two-year yield hit 4.8%, the highest since 2007. The dollar climbed. Swaps are now pricing in 25 basis-point hikes at the Fed’s next three meetings, and bets on the peak rate rose to about 5.4% by July. The benchmark sits in a 4.5%-4.75% range.
The unexpected acceleration in the personal consumption expenditures gauge underscored the risks of persistently high inflation. Furthermore, resilient spending paired with the exceptional strength of the labor market will make it tougher for the Fed to get inflation to its 2% goal. Separate data showed US consumer sentiment rose to the highest in a year while new home sales topped forecasts.
Officials may need to raise rates as high as 6.5% to defeat inflation, according to new research that was critical of the central bank’s initially slow response to rising prices. In a paper presented Friday in New York, a quintet of Wall Street economists and academics argue that policymakers have an overly-optimistic outlook and will need to inflict some economic pain to get prices under control.
Question of the Day: Will Rates Go Even Higher for Even Longer?
Mohamed El-Erian says financial markets are starting to doubt whether the Fed can bring inflation down to its target.
“We’re seeing actual and survey indicators heading the wrong way,” El-Erian, the chairman of Gramercy Funds and a Bloomberg Opinion columnist told Bloomberg Television.
Cleveland Fed President Loretta Mester said a bigger-than-expected rise in the central bank’s preferred inflation gauge shows the need to keep raising rates, but stopped short of suggesting this warranted a step-up to a half-point hike. The report is “just consistent with the fact that the Fed needs to do a little more on our policy rate to make sure that inflation is moving back down,” she added.
As investors position for the risk that the Fed persists with hawkish policy moves, they have been dumping equities and cash alike in favor of bonds, Bank of America Corp. strategists said.
Global equity funds lost $7 billion in outflows in the week through Feb. 22, while $3.8 billion left cash funds, according to a note from the bank, which cited EPFR Global data. At $4.9 billion, bonds drew additions for an eighth straight week in the longest such streak since November 2021, the team led by Michael Hartnett said.
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Greg Wilensky, head of US fixed income at Janus Henderson:
“This was not the news the Fed or investors had been hoping for and, as such, we expect markets to adjust to the likelihood that the Fed will need to raise rates higher, and keep them higher for longer, than they had been pricing in previously. Viewing the hotter inflation data together with continued strength in the labor market and consumer spending implies that the Fed still has work to do. It appears investors will have to wait a little longer for the much-anticipated Fed pause.”
Krishna Guha, vice chairman at Evercore:
“The likelihood of achieving a soft landing dips, with the risk of no-landing potentially forcing the Fed to push rates higher and hold longer, with greater risk that this ultimately pushes the economy into a mild recession. So risk-off pure and simple. We still think the Fed is not likely to return to 50bp hikes, though that risk has nudged up with the latest data.”
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance:
“It is much too soon for the Fed to say ‘mission accomplished.’ It is far too early to extend duration and buy the dips in bond prices, let alone trying to continue to buy the dips in the stock market. We have been exercising much more caution and have advised our clients to be careful and not aggressive at this point in the economic cycle.”
Peter Boockvar, author of the Boock Report:
“Bottom line, Treasury yields are moving higher in response to the higher than expected inflation stats and reminder that while the trend will still be down, it will still take time to get to some Fed comfort level. Either way, at least looking at the core PCE, we FINALLY have ZERO real interest rates. I know some are still trying to figure out how many hikes the Fed has left, but it’s not many and AGAIN, higher rates for a longer time frame should be the focus.”
Jeffrey Roach, chief economist at LPL Financial:
“The Fed may still decide to hike by 0.25% at the next meeting but this report means that the Fed will likely continue hiking into the summer. Markets will likely stay choppy during these months where higher rates have yet to materially cool consumer spending.”
Money managers are fortifying portfolios and hedging the risk of a prolonged inflation fight by sticking to credit maturing in just a few years.
Some funds are actively cutting so-called duration, a measure of sensitivity to interest rates, to limit the fallout if central banks keep hiking to tackle inflation. Others are simply focusing on short-dated notes as the additional yield they get from longer securities is too small to justify the risk of a slump when rates rise.
In corporate news, Boeing Co. sank after pausing deliveries of its 787 Dreamliner over a documentation issue with a fuselage component. Carvana Co. slumped on a much wider loss than Wall Street had expected for the used-car retailer. Beyond Meat Inc. surged on sales that exceeded expectations and the plant-based meat maker showed progress toward its goal of becoming profitable.
On the geopolitical front, the White House will raise tariffs on more than 100 Russian metals, minerals and chemical products, it said Friday in a statement announcing a fresh round of measures to mark the one-year anniversary of the invasion of Ukraine.
US Treasury Secretary Janet Yellen warned China and other nations against providing material support to Russia, saying any such actions would amount to an evasion of sanctions and would “provoke very serious consequences.”
Elsewhere, the yen retreated as Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1.5% as of 10:48 a.m. New York time
- The Nasdaq 100 fell 2.1%
- The Dow Jones Industrial Average fell 1.3%
- The Stoxx Europe 600 fell 0.9%
- The MSCI World index fell 1.4%
Currencies
- The Bloomberg Dollar Spot Index rose 0.6%
- The euro fell 0.4% to $1.0553
- The British pound fell 0.5% to $1.1956
- The Japanese yen fell 1.2% to 136.26 per dollar
Cryptocurrencies
- Bitcoin fell 1.8% to $23,449.67
- Ether fell 2.1% to $1,610.61
Bonds
- The yield on 10-year Treasuries advanced six basis points to 3.94%
- Germany’s 10-year yield advanced seven basis points to 2.55%
- Britain’s 10-year yield advanced six basis points to 3.65%
Commodities
- West Texas Intermediate crude fell 0.2% to $75.22 a barrel
- Gold futures fell 0.4% to $1,818.80 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee.
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