Markets sold off around the world on growing signs that the global economy is weakening just as central banks ramp up the pressure further with further interest rate hikes. The Dow Jones Industrial Average closed at its lowest point of the year on Friday. The S&P 500 fell 1.7%, near its 2022 low. Energy prices also closed sharply lower as traders worried about a possible recession. Treasury yields, which affect mortgage rates and other types of loans, remained at multi-year highs.
European stocks fell by as much or more after preliminary data there suggested business activity had its worst monthly contraction since early 2021. Adding to the pressure was a new plan announced in London to reduce taxes, which sent UK yields soaring because 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 undermining high inflation, with bigger increases promised in the future. But these moves are also holding back their economies, threatening recession as growth slows around the world. In addition to Friday’s dismal data on European business activity, a separate report suggested that US activity is also slowing, although not as severely as in previous months.
“Financial markets are now fully absorbing the Fed’s tough message that there will be no retreat from the fight against inflation,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research note.
Crude oil prices fell to their lowest levels since the beginning of the year on concerns that a weaker global economy is consuming less fuel. Cryptocurrency prices also fell sharply because higher interest rates tend to hit investments that seem more expensive or riskier.
Even gold fell in the global rout as higher-yielding bonds make non-interest-paying investments look less attractive. Meanwhile, the US dollar has been moving strongly to the upside against other currencies. This can hurt the profits of American companies with many businesses abroad, as well as put financial pressure on much of the developing world.
The Dow Jones Industrial Average fell 505 points, or 1.7%, to 29,572 and the Nasdaq was down 1.9% at 3:43 p.m. ET. Shares of smaller companies fared even worse. The Russell 2000 fell 3%. US crude prices fell 5.7% and weighed heavily on energy stocks.
More than 90% of S&P 500 stocks were in the red, with technology companies, retailers and banks among the benchmark’s biggest weights. The major indexes are on pace for their fifth weekly loss in six weeks.
The Federal Reserve on Wednesday raised its benchmark rate, which affects many consumer and business loans, to a range of 3% to 3.25%. At the beginning of the year it was practically at zero. The Fed also released a forecast suggesting its benchmark rate could be 4.4% by the end of the year, a point higher than expected in June.
Treasury yields have risen to multi-year highs as interest rates rise. The 2-year Treasury yield, which tends to track expectations for Federal Reserve action, rose to 4.19% from 4.12% late Thursday. It is trading at its highest level since 2007. The 10-year Treasury yield, which influences mortgage rates, fell from 3.71% to 3.68%.
Higher rates mean Goldman Sachs strategists say most of their clients now see a “hard landing” that takes the economy much lower as inevitable. The question for them is only about the timing, magnitude and duration of a potential recession.
Higher interest rates hurt all kinds of investments, but stocks could hold steady as long as corporate profits grow strongly. The problem is that many analysts are starting to cut their forecasts for future earnings because of higher rates and worries about a possible recession.
“Increasingly, market psychology has shifted from concerns about inflation to concerns that, at the very least, corporate profits will decline as economic growth slows demand,” said Quincy Krosby, global strategist head of LPL Financial.
In the US, the labor market has remained remarkably strong and many analysts think the economy grew in the summer quarter after contracting in the first six months of the year. But the encouraging signs also suggest the Fed may need to raise rates further to achieve the cooling needed to reduce inflation.
Some key areas of the economy are already weakening. Mortgage rates have hit 14-year highs, causing existing home sales to fall 20% last year. But other areas that perform better when rates are low are also suffering.
Meanwhile, in Europe, the already fragile economy is grappling with the effects of the war on its eastern front following Russia’s invasion of Ukraine. The European Central Bank is raising its key interest rate to fight inflation, even as the region’s economy is already expected to slip into recession. And in Asia, China’s economy is struggling with still-tight measures aimed at limiting COVID infections that are also hurting businesses.
While Friday’s economic reports were discouraging, few on Wall Street saw them as enough to convince the Fed and other central banks to soften their stance on rate hikes. So they only reinforced the fear that rates will continue to rise in the face of already slowing economies.
—Economics writer Christopher Rugaber and business writers Joe McDonald and Matt Ott contributed to this report.
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