US stocks were on course for their biggest weekly drop in more than two months on Friday, after the latest evidence of stubbornly high inflation in the world’s largest economy unnerved traders.
The S&P 500 was down 1 per cent in mid-afternoon trading, bringing its losses for the week to 2.6 per cent. The tech-heavy Nasdaq Composite was 1.6 per cent lower for the day, a 3.3 per cent decline for the week.
After an unexpectedly strong start to the year, US stocks have now declined for three consecutive weeks. Disappointing economic data have increased expectations that the Federal Reserve will have to hold interest rates at higher rates for an extended period to bring inflation back towards its 2 per cent target, putting pressure on equity valuations.
Central bank officials have repeatedly warned that rates would be high for some time, but Jonathan Golub, chief US market strategist at Credit Suisse, said “the market wasn’t listening” until the recent data convinced them.
The most recent disappointment came on Friday as data showed core monthly personal consumption expenditure — the Fed’s preferred measure of inflation — rose more than expected in January. Prices increased 0.6 per cent month on month, and 4.7 per cent year on year — substantially more than average forecasts of a 4.3 per cent rise.
“The market is now beginning to discount a different kind of backdrop” featuring a combination of stubborn inflation and weak economic growth, said Golub. “It’s stagflation lite.”
Friday’s figures followed strong labour market and consumer price data earlier this month. Jeffrey Roach, chief economist for LPL Financial, said the latest numbers “all but ensure the Fed will continue on its rate hiking campaign for a lot longer than markets anticipated just a few weeks ago”.
US Treasuries sold off alongside stocks, with the interest rate-sensitive two-year yield rising 0.11 percentage points to 4.80 per cent, the highest since June 2007. Yields rise when prices fall. The 10-year Treasury yield climbed 0.06 percentage points to 3.95 per cent. Bond prices fall when yields rise.
Markets are now pricing in a rise in the benchmark fed funds rate to between 5.25 per cent and 5.5 per cent by July — more than half a percentage point higher than where investors thought rates would peak at the start of February.
European stocks also dropped on Friday. The region-wide Stoxx 600 fell 1 per cent, while London’s FTSE 100 dipped 0.4 per cent.
Germany’s Dax declined 1.7 per cent and the French CAC 40 was down 1.8 per cent.
Investors are also concerned that the European Central Bank will lift rates further. Joachim Nagel, president of the Bundesbank and a member of the ECB’s governing council, said on Friday that inflation was likely to “remain at very high levels”, requiring “significant interest rate hikes beyond March”.
Earlier in Asia, the Hang Seng index fell 1.7 per cent, while China’s CSI 300 lost 1 per cent. Although ecommerce group Alibaba beat analysts’ expectations with its fourth-quarter earnings, its shares fell 5.4 per cent, suggesting investor skittishness over China’s economy despite the government easing Covid-19 restrictions.
The dollar index, which measures the greenback against a basket of six peers, rose 0.6 per cent.