Wall Street stocks tumbled on Thursday after worsening U.S. economic data fueled fears of a looming recession, although the numbers raised the chance of fewer interest rate hikes when the Federal Reserve meets at the end of the month.
The U.S. benchmark S&P 500 and the tech-heavy Nasdaq Composite were down 0.7 percent in early New York trade, after European shares fell sharply earlier in the day.
December data showing weak U.S. retail sales and a sharp drop in industrial production sent the S&P 500 down 1.6 percent on Wednesday, reversing a rally in equity markets despite signs of slowing economic growth.
Confident that inflation has peaked, investors are nonetheless growing concerned about the depth of the expected recession and the effects of the Fed’s aggressive monetary tightening campaign on corporate earnings. Microsoft’s decision to cut 10,000 jobs only added to the gloom, while shares of consumer goods conglomerate Procter & Gamble fell after reporting a slowdown in net sales.
“Bad news is bad news,” Charlie McElligott, strategist at Nomura, reiterated. Noting the relatively strong start to 2023 for US equities against an uncertain macroeconomic backdrop, Premier Miton’s chief investment officer Neil Birrell joked that he was “concerned that we have a full-year return in the first two weeks”.
However, the US labor market remains tight even as other parts of the economy slow. Initial claims for jobless benefits fell to 190,000 in the week ended Jan. 14 from 205,000 in the previous week, data released on Thursday showed. Economists polled by Reuters had expected 214,000 claims.
A slowdown in economic activity elsewhere exacerbated “concerns about growth and corporate earnings for equity investors” but strengthened the “disinflation narrative” for bond investors, according to analysts at JPMorgan.
U.S. Treasuries, which had risen across the board in the previous session, sold off on Thursday, with the yield on the benchmark 10-year note rising 0.02 percentage point to 3.39 percent. Bond yields move inversely with prices.
Weaker-than-expected retail sales and industrial production also weakened the dollar, which fell 0.2 percent against a basket of six currencies as traders increased their bets that the Fed will raise interest rates by a quarter of a percentage point in February after 0.5 percentage point move in December.
Federal Reserve Bank of Dallas President Laurie Logan appeared to back a 0.25 percentage point rate hike next month, while warning investors not to get ahead of themselves.
“A slower pace could reduce near-term interest rate uncertainty, which would mechanically ease financial conditions,” Logan said on Wednesday. “But if that happens, we can offset the effect by gradually raising rates to a higher level than expected so far.”
In Europe, the regional Stoxx 600 index, which has risen for six straight sessions, fell 1.4 percent. Germany’s Dax lost 1.5 percent and London’s FTSE 100 lost 1 percent, dragged down by European Central Bank President Christine Lagarde’s pledge to “stay the course” on interest rate hikes. The hawkish comments sent German and Italian government bond yields soaring.
Elsewhere, Hong Kong’s Hang Seng index fell 0.1 percent and China’s CSI 300 added 0.6 percent, both indexes having risen sharply in recent months thanks to Beijing’s reversal of strict zero-Covid policies in December.
Brent crude, the international oil benchmark, rose 0.4 percent, erasing earlier losses, to $85.72 a barrel.
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