New York: US stocks continued to drop as latest data indicated that the Federal Reserve’s aggressive tightening is hitting the economy, with investors concerned that the central bank’s resolve to keep raising rates could tip the economy into a recession.
The S&P 500 fell more than 1 per cent. The tech-heavy Nasdaq 100 also declined. The quarterly triple witching expiration of equity derivatives is amplifying market moves on Friday.
US Treasuries pared losses after Purchasing Managers’ Index indicators showed a contraction in the services and manufacturing sectors. Oil trimmed a weekly gain. The dollar fluctuated.
Risk assets have been on the back foot since the Fed and the European Central Bank reaffirmed rates will go higher for longer until inflation fell back to their targets. While that belied market expectations for a lower peak rate and potential rate cuts in 2023, it also clouded the growth outlook. Economists now see a 60 per cent probability of recession in the US and an 80 per cent chance in Europe. Equity analysts have cut 12-month earnings estimates for the regions to the lowest levels since March and July, respectively.
Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald, said he remains “very bearish” on equities and cyclicals.
“Reality will set in soon. The good news is behind us “- the Fed is about done, inflation is falling and China is reopening,” Johnston said. “The bad news is ahead of us “- delayed negative economic impact from rate hikes, living with a 5 per cent Fed funds rate, poor economic growth and job losses, negative earnings revisions and global QT. The risk reward in owning equities at these levels is simply very terrible.”
New York Fed President John Williams further bruised sentiment on Friday after he said on Bloomberg Television that a tight labor market was likely to keep inflation high and warrant more rate increases.
Europe’s equity benchmark fell for a third day, dragged by growth-sensitive sectors such as real estate, technology and financial services. Both UK gilts and German bunds tumbled after ECB President Christine Lagarde delivered an unambiguously hawkish message, disabusing markets of any bets for a slowdown in rate hikes.
A benchmark of Asian equities posted the first weekly decline since October. The MSCI ACWI Index, the global equities gauge, headed for a 1.4 per cent retreat this week.
Ann-Katrin Petersen, senior investment strategist at BlackRock Investment Institute, said on Bloomberg Television that central banks were starting to acknowledge they will have to crush growth and will likely engineer recessions to tame inflation.