Stock market review | The threat of inflation is driving the markets down

(Toronto and New York) Stocks fell on Thursday as investors refocused on the risk of runaway inflation and the economic distress stemming from a rise in interest rates to levels not seen in more than 10 years continuing a downward move that had already sent Wall Street into a bear market.

Posted at 4:13pm
Updated at 11:10 p.m

Isabella Simonetti and Jason Karaian
The New York Times

The S&P 500 fell 3.3%, part of a global pullback that also led to sharp falls in European stocks. With Thursday’s decline, the S&P 500 is now nearly 24% below its Jan. 3 high and on track for its worst quarter since 2008, when the economy was devastated by a global financial crisis.

Europe’s Stoxx 600 index fell 2.5%, its seventh drop in eight days, and so did the FTSE 100 in London, which fell 3.1%.

Thursday’s drop came a day after the Federal Reserve (Fed) announced its biggest rate hike in decades, a sign it is willing to inflict economic pain to get inflation under control, with other central banks following suit. The Bank of England announced its fifth straight interest rate hike on Thursday and the Swiss central bank raised its interest rate for the first time in 15 years, a more aggressive move than many had expected.

Central banks are raising borrowing costs to discourage spending, whether on new homes or car loans, but the move is also slowing economic growth and threatening corporate profits.

Interest rates are rising rapidly in tandem with the Fed’s benchmark rate now in a 1.5% to 1.75% range from near zero in March. Average mortgage rates have nearly doubled this year – rising from just over 3% to around 5.8% on Thursday. This is the highest level for 30-year fixed-rate mortgages since 2008, according to Freddie Mac.

As a result, shares in construction companies such as KB Home and Lennar fell. As of Thursday, they were down 8% and 6.5%, respectively, losses that have seen them fall more than 40% year-to-date.

And government bond yields, which support the cost of borrowing across the economy, are rising sharply this year as the central bank hikes interest rates. On Thursday, the yield on 10-year Treasury bills was 3.2%, a level not seen in more than 10 years.

The Toronto Stock Exchange also down

The Toronto Floor’s S&P/TSX Composite Index lost 607.50 points, or more than 3%, to end the session at 19,004.06 points. It is now down 24% from where it started the year.

“For me, it’s all about the Federal Reserve,” said Allan Small, an analyst at IA Private Wealth Management.

Fears about rising borrowing costs and their knock-on effects – starting with the real estate market – are weighing on a number of indices. Meanwhile, concerns are mounting over whether the US Federal Reserve’s rate hikes will address problems largely caused by factors largely beyond its control, he said.

“At the end of the day, I don’t think the fact that the Fed is rising so aggressively is doing anything for inflation — at least not yet,” Small said. Hence the even greater concern about economic stability.

The recovery could be delayed

Analysts say the stock market is unlikely to recover until there are clear signs that inflation is beginning to be brought under control, which would ease pressure on the Fed to raise rates quickly. Stocks rallied briefly in late May, ending a seven-week losing streak when data seemed to show CPI inflation had peaked, but selling resumed last week after a new CPI report showed inflation was accelerating again and rose 8.6% in May from a year earlier.

“Ongoing inflation could be a killer for the stock market,” said Edward Moya, senior market analyst at OANDA, who notes that rising food, energy and home prices are weighing on businesses and consumers.

Fed Chair Jerome Powell stressed at a news conference on Wednesday that forcing a recession is not part of the central bank’s plan, but economists are skeptical.

Analysts at Deutsche Bank, for example, have called the central bank “overly optimistic” because they believe it can tame inflation without triggering a recession.

“Only when it is clear that the United States has experienced a spike in inflation are concerns about the path of Fed hikes likely to subside significantly,” wrote Jane Foley, strategist at Rabobank, in an email. “Meanwhile, market sentiment is likely to remain shaped. »

Revisions to economic forecasts are coming fast. Economists at IHS Markit, for example, are now saying that US gross domestic product is expected to have grown 0.8% pa in the second quarter. Just last week they were forecasting growth of 2.4%.

With the Canadian Press

This article was originally published in New York Times.

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