(Bloomberg) – Stocks have faced great volatility, with traders weighing mixed economic numbers amid bets they won’t be enough to stop the Federal Reserve from reducing the pace of tightening next week, as recently reported.
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The S&P 500 faltered as an unexpected drop in near-term inflation expectations tempered concerns with a warmer-than-expected reading for producer prices. Swaps are still signaling that market betting makers will hike rates 50 basis points on Wednesday, following four consecutive 75 basis point hikes.
“Keep in mind that compared to where we were a year ago, we’re in a better position and we’re moving in the right direction,” said Mike Loewengart of the Morgan Stanley Global Investment Office. “Today’s warmer-than-expected report is unlikely to be enough to push the Fed to stick to 75 basis point hikes next week, but any negative news on the inflation front is a thorn in the side of the Fed and investors.”
On the eve of the Fed’s decision, all eyes will be on Tuesday’s consumer inflation figures. US central bankers, including Chairman Jerome Powell, have signaled a slowing pace of rate hikes while stressing that borrowing costs will need to keep rising and remain tight for some time to beat inflation.
A combination of factors, including lingering inflationary pressures and higher interest rates for longer, could mean the widely expected economic recession in 2023 will prove shallow but prolonged, according to strategists at Bloomberg Intelligence. A slight rebound in earnings amid higher lending rates could slow the S&P 500’s annualized return to 5.7% in each of the next three years, half the speed of the 2010-2019 cycle.
While many investors are eagerly awaiting the Fed’s latest rate hike, history shows they should be wary of it as long as inflation remains high, according to strategists at Bank of America Corp.
Analysis by Michael Hartnett and his team showed that stocks outperformed after the Fed stopped raising rates during periods of disinflation over the past 30 years. However, during the high inflation era of the 1970s and 1980s, stocks had fallen after the last rise, they wrote in a note. In the current cycle, they expect the Fed to raise rates for the last time in March 2023.
The International Monetary Fund, World Bank and others have raised concerns about the deteriorating global outlook, while hoping China’s reopening will help support global growth. IMF Managing Director Kristalina Georgieva said indicators show further downgrades in global growth are likely. The institution currently forecasts that global growth will be 2.7% next year, compared to 3.2% this year.
Some of the world’s biggest investors are predicting equities to post low double-digit gains next year, which would bring relief after global equities suffered their worst loss since 2008.
Amid recent optimism that inflation has peaked — and the Fed may soon start to change its tune — 71% of respondents to a Bloomberg News survey expect stocks to rise, versus 19% predicting declines. For those seeing gains, the average response was a 10% return.
No borrowers are looking to sell new US investment-grade bonds on Friday, according to an informal survey of debt underwriters.
The market was eagerly awaiting data from the Producer Price Index, a key reading for inflation, which came in hotter than expected. It’s unclear whether a company that pulled out on Wednesday and Thursday will return for another look next week, but it looks like there aren’t many other deals in sight for the rest of December.
Elsewhere, oil rose after President Vladimir Putin said Russia could cut production.
Some of the major movements in the markets:
Shares
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The S&P 500 was little changed at 11:11 a.m. PT
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The Nasdaq 100 rose 0.3%
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The Dow Jones Industrial Average is little changed
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The Stoxx Europe 600 rose 0.7%
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The MSCI World index rose 0.3%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro fell 0.2% to $1.0537
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The British pound rose 0.4% to $1.2288
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The Japanese yen was little changed at 136.60 per dollar
Cryptocurrencies
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Bitcoin was little changed at $17,174.48
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Ether fell 0.2% to $1,275.69
Obligations
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The yield on 10-year Treasury bills rose eight basis points to 3.56%
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The German 10-year rate rose 11 basis points to 1.93%
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The UK 10-year yield rose nine basis points to 3.18%
Goods
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West Texas Intermediate crude rose 0.8% to $72.04 a barrel
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Gold futures rose 0.4% to $1,809.10 an ounce
This story was produced with assistance from Bloomberg Automation.
–With the help of Elena Popina.
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