Energy prices closed sharply lower as traders worried about a possible recession. Treasury yields, which affect rates on mortgages and other types of loans, have held at multi-year highs.
European stocks fell just as sharply or more after preliminary data suggested business activity suffered its worst monthly contraction since the start of 2021. A new plan announced in London to cut taxes added to the pressure , which pushed UK yields higher as it could eventually force its central bank to raise rates even more sharply.
The Federal Reserve and other central banks around the world aggressively raised interest rates this week in hopes of curbing high inflation, with further big increases promised for the future. But such measures are also dampening their economies, threatening recessions as growth slows around the world. In addition to Friday’s discouraging data on European business activity, a separate report suggests that US activity is also continuing to contract, although not as badly as in previous months.
“Financial markets are now fully absorbing the stern message from the Fed that there will be no backing down in the fight against inflation,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research report. .
U.S. crude oil prices fell 5.7% to their lowest levels since the start of this year on fears that a weaker global economy could consume less fuel. Cryptocurrency prices have also fallen sharply as higher interest rates tend to hit investments that seem the most expensive or riskiest the hardest.
Even gold has fallen in the global rout, as bonds offering higher yields make interest-free investments less attractive. Meanwhile, the US dollar has appreciated strongly against other currencies. This can hurt the profits of American companies with extensive overseas operations, as well as put financial strain on much of the developing world.
The S&P 500 fell 64.76 points to 3,693.23, its fourth consecutive decline. The Dow Jones, which at one point was down more than 800 points, lost 486.27 points to close at 29,590.41. The Nasdaq fell 198.88 points to 10,867.93.
Smaller company stocks fared even worse. The Russell 2000 fell 42.72 points, or 2.5%, to close at 1,679.59.
More than 85% of S&P 500 stocks closed in the red, with technology companies, retailers and banks among the largest weights in the benchmark.
The Federal Reserve on Wednesday raised its benchmark rate, which affects many consumer and business loans, to a range of 3% to 3.25%. It was almost nil at the start of the year. The Fed also released a forecast suggesting its benchmark rate could be 4.4% by the end of the year, one point higher than expected in June.
Treasury yields have hit multi-year highs as interest rates rise. The 2-year Treasury yield, which tends to track Federal Reserve action expectations, rose to 4.20% from 4.12% late Thursday. It is trading at its highest level since 2007. The 10-year Treasury yield, which influences mortgage rates, slipped to 3.69% from 3.71%.
Goldman Sachs strategists say a majority of their clients now see a “hard landing” that drags the economy down as inevitable. For them, the question is only about the timing, depth and duration of a potential recession.
Higher interest rates are hurting all types of investments, but equities could hold steady as long as corporate earnings rise sharply. The problem is that many analysts are starting to lower their forecasts for future earnings due to higher rates and worries about a possible recession.
“Increasingly, the psychology of the market has shifted from worries about inflation to worries that, at a minimum, corporate earnings will decline as economic growth slows demand,” said Quincy Krosby, global strategist. head for LPL Financial.
In the US, the job market remained remarkably strong and many analysts believe the economy grew in the summer quarter after shrinking in the first six months of the year. But the encouraging signs also suggest that the Fed may need to raise rates further to get the cooling needed to bring inflation down.
Some key sectors of the economy are already weakening. Mortgage rates hit 14-year highs, causing existing home sales to plummet 20% in the past year. But other areas that do better when rates are low are also suffering.
In Europe, meanwhile, the already fragile economy is dealing with the effects of war on its eastern front following Russia’s invasion of Ukraine. The European Central Bank is raising its key rate to fight inflation even as the region’s economy is already set to plunge into recession. And in Asia, the Chinese economy is grappling with still-strict measures meant to limit Covid infections that are also hurting businesses.
While Friday’s economic reports were disheartening, few on Wall Street saw them as enough to convince the Fed and other central banks to ease their stance on raising rates. So they only heightened fears that rates will continue to rise in the face of already slowing economies.