Stocks drift as hawkish central banks sap spirits: markets wrap
US stocks drifted on Thursday as policy tightening fears from the US to Norway and the UK hobbled a bull market return.
The S&P 500 was little changed after Wednesday’s slide on hawkish warnings by Federal Reserve chair Jerome Powell in testimony to Congress. The latest jobs data on Thursday gave no cause to doubt Powell’s assessment, with weekly initial jobless claims unchanged versus the previous period.
In Europe, all industry sub sectors fell, led in part by a decline in UK stocks as the Bank of England raised its benchmark rate by more than economists’ expectations, raising concern the economy may tip into a recession.
With the battle with inflation far from over, central banks across the world are wielding more rate increases and thwarting bets that tightening cycles were set to wind down. That’s prompted investors to rethink animal spirits unleashed by last week’s Fed rate pause.
“Recession risks are arguably higher if rates are higher for longer, but risk assets are not reflecting that,” said Janet Mui, head of market analysis at RBC Brewin Dolphin. “Markets are re-assessing whether further risk taking is justified after the year-to-date-rally.”
In the US, hard-landing fears re-established themselves amid the prospect of tighter policy, pushing the inversion of a key segment of the Treasury yield curve to a full percentage point for the first time since March.
Powell underscored the need to tame inflation during his semi-annual report to Congress on Wednesday, saying two more rate hikes this year was “a pretty good guess.” His warning preceded Thursday’s policy meetings in England, Switzerland, Norway and Turkey.
The BOE lifted its policy rate by 50 basis points to 5% as it struggles to contain inflation that rose by 8.7%, higher than expected for a fourth month. Money market pricing now implies the BOE’s benchmark will reach more than 6% by the end of the year, which would be the highest since the turn of the century.
“The UK has the unenviable title of highest core inflation rate in the G7, and by quite some margin,” said Seema Shah, chief global strategist at Principal Asset Management. “It requires the central bank to adopt a clearly hawkish attitude that signals further sizable moves over the coming months.n. A sharper slowdown of the UK economy will be an unfortunate, but necessary, fallout from monetary policy.”
Earlier, Norway’s central bank lifted its key deposit rate by 50 basis points to 3.75%, the 11th hike in its benchmark since September 2021. Officials said the rate will “most likely be raised further in August” and forecast a peak rate of 4.25% later this year.
By contrast, the Swiss National Bank delivered the smallest interest-rate hike since it began monetary tightening a year ago, lifting its key rate by a quarter-point to 1.75%. Swiss inflation is the slowest of any advanced economy.
Turkey’s lira plunged to a record against the dollar after the central bank hiked significantly less than most economists expected, a sign that policymakers will favour a gradual transition from an era of ultra-cheap money. DM