The volatile rise in US stocks this year shows no signs of easing as data on high inflation makes it likely that the Federal Reserve will continue to raise interest rates further, increasing the chances of a recession. The US stock indices closed negative on Friday, with the S&P 500 and Nasdaq indices showing their biggest weekly percentage decline since June, as inflation worries, looming interest rate hikes, and warning signs for the economy weighed in. As the stock market closed on Friday, the Dow Jones Index (US30) decreased by 0.45% (-4.16% for the week), and the S&P 500 Index (US500) fell by 0.72% (-5.15% for the week). The NASDAQ Technology Index (US100) lost 0.90% (-5.97% for the week).
After last week's strong inflation numbers, expectations that the Fed will eventually raise rates much higher increased. On September 9, the futures markets estimated a less than 1% chance that the Fed's target rate would be above 4.5% by February. CME Group estimated that those odds had risen to 36% by Friday morning. This leads to a drop in stock prices and an increase in the likelihood of a recession. Annual Treasury bond yields are now more than 4%, the highest since 2007. Economists at Deutsche Bank have analyzed the potential endpoint of the Fed's target rate using several different approaches. They all suggest a federal funds rate of 4.5% or so may be needed by early next year. If the outlook, quickly considered by the markets, becomes a reality, it marks the end of an era when rates were permanently pegged at zero. Ray Dalio, the founder of the large hedge fund Bridgewater, argues that if the Fed eventually raises rates to 4.5%, it means a 20% drop in stock prices because of the higher discount rate on future earnings as well as lower earnings. No one wants a recession, but central banks are willing to take risks to show anti-inflationary resolve.
Stock markets in Europe were mostly down on Friday. German DAX (DE30) fell by 1.66% (-3.27% for the week), French CAC 40 (FR40) was down by 1.31% (-2.65% for the week), Spanish IBEX 35 (ES35) fell by 1.25% (-1.26% for the week), British FTSE 100 (UK100) was down by 0.62% (-1.56% for the week).
The annualized Consumer Price level in the Eurozone reached 9.1% (compared to 8.9% in July). A year earlier, it was 3.0%. ECB member Nagel said Friday that the ECB would continue to raise rates to control inflation. Another ECB official, Ren, also agrees with the view that the ECB needs to keep raising rates.
The prospect of lower short-term inflation takes some pressure off the Bank of England to act even more aggressively. Analysts believe the Bank of England will stick with a 50 basis point rate hike, even as the US Federal Reserve and the ECB act more aggressively. The government guarantee of energy prices means that inflation is unlikely to get much higher.
Due to concerns about corruption in Hungary, the European Commission is considering freezing up to 65% of Hungary's payments under the three main programs from the EU cohesion fund, amounting to about €7.5 billion. For his part, Hungarian Prime Minister Viktor Orban said he would oppose extending the anti-Russian sanctions, which he called a "shot in the foot." He predicted that up to 40% of the European industry will stop in winter because of the energy crisis.
The German government may increase its stake in Uniper SE above 50% and is willing to take the historic step of fully nationalizing the country's largest gas importer to prevent the collapse of the energy system.
The European Commission recommends that EU countries withdraw excess profits of energy companies from high energy prices, directing them to support citizens and consumer companies and reduce energy consumption by 5% this winter.
For the week, US benchmark oil was down nearly 2%, adding to the nearly 7% decline of the previous two weeks. Putin's rhetoric seems to have lost its impact on energy traders, even though the energy market as a whole remains very tight on supplies. There was a time when Putin's mere hint at cutting energy exports from Russia caused oil prices to rise steadily. But things are changing. At this point, much of the inflated oil and gas price forecasts for the fourth quarter of this year and the first quarter of 2023 are based on predictions that the coming winter will be harsh. India is not a G7 country considering imposing a price ceiling on Russian energy - India's First Deputy Foreign Minister Vinay Kwatra.
Asian markets traded lower last week. Japan's Nikkei 225 (JP225) lost 3.22%, Hong Kong's Hang Seng (HK50) decreased by 0.70%, and Australia's S&P/ASX 200 (AU200) was 2.25% lower over the week.
In the commodities market, silver futures (+9.19%), platinum (+3.23%), and soybean (+3.07%) showed the biggest gains. Futures on lumber (-7.18%), coffee (-5.51%), cotton (-5.29%), gold (-2.55%), and natural gas (-2.24%) showed the biggest drop.
S&P 500 (F) (US500) 3,873.33 −28.02 (−0.72%)
Dow Jones (US30) 30,822.42 −139.40 (−0.45%)
DAX (DE40) 12,741.26 −215.40 (−1.66%)
FTSE 100 (UK100) 7,236.68 −45.39 (−0.62%)
USD Index 109.64 −0.10 (−0.09%)
- – New Zealand RBNZ Gov Orr Speaks at 06:00 (GMT+3).
by , 2022.09.19
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