NEW YORK — Shares on Wall Street fell on Thursday after the latest reminder that central banks are now more concerned with fighting inflation than supporting markets.
The S&P 500 fell 2.4%, putting it on track for its ninth losing week in the past 10 years. The Dow Jones Industrial Average fell 1.9% and the Nasdaq composite lost 2.7%.
Wall Street’s losses accelerated as the close of trading approached, with traders scrambling to make the final moves ahead of a much-anticipated US inflation report due out this morning. The S&P 500 decline more than doubled in the past hour of trading.
Market weakness began across the Atlantic after the European Central Bank said it would raise interest rates next month for the first time in more than a decade. Another increase is expected for September, possibly double July’s increase, and the central bank will also end its bond-buying program next month.
All of this marks a “radical shift” in policy for the European Central Bank, according to Marilyn Watson, head of global fundamental fixed income strategy at BlackRock.
And it’s part of a growing global tide where central banks are scrapping the ultra-low interest rates that were supposed to boost borrowing, economic growth and stock prices during the pandemic. Instead, they focused on raising interest rates and other measures to slow growth to reduce high inflation.
The risk is that such moves could trigger a recession. Even if central banks can pull off the delicate balancing act, higher interest rates still put downward pressure on stocks and all kinds of investments.
Most people expect the Fed to raise its key rate next week by half a percentage point, the second straight increase of twice the usual amount. Investors expect a third to hit in July.
The Fed’s direction from here depends on the path of inflation, which is why Wall Street is so on top of today’s reading of the US Consumer Price Index. Economists expect inflation to have eased slightly to 8.2% in May from 8.3% a month earlier.
Investors looked for signs that inflation may have already passed its peak, which would be good for markets as it could mean a less aggressive Fed. Speculation is rife that the Fed could pause rate hikes at its September meeting, swinging with every data point on the economy. This in turn has made stocks particularly prone to large swings.
The S&P 500 fell 97.95 points to close at 4,017.82, while the Dow Jones Industrial Average fell 638.11 to 32,272.79 and the Nasdaq composite fell 332.04 to 11,754, 23.
European stocks fell immediately after the European Central Bank’s rate announcement, which came before US markets opened. French stocks were down only slightly before the announcement, but the CAC 40 index fell to a loss of 1.4% afterwards. The German DAX lost 1.7%.
In the US, Treasury yields rose after the move from Amsterdam, although they faltered slightly thereafter. The 10-year Treasury yield hit 3.09% before falling back to 3.04% from 3.02% on Wednesday night.
A report showed that slightly more American workers filed for unemployment last week than economists expected. This is a potentially negative signal, but the overall number still remains historically low. Economists also said seasonal factors may have affected the most recent figures, exaggerating some things due to the Memorial Day holiday.
Rising gasoline prices have put greater pressure on businesses and households, increasing pressure on budgets. Crude oil prices fell slightly on Thursday, but remain up about 60% for the year. Much of the jump is due to Russia’s invasion of Ukraine.
Lockdowns in major Chinese cities due to covid-19 have added more pressure on global supply chains, which in turn is worsening inflation. But some of the impact may be fading. China reported that its exports jumped 17% year on year earlier in May, from a 3.7% growth in April, as coronavirus precautions eased in Shanghai and other cities.
Many investors are bracing for the sharp swings in financial markets to continue given the deep uncertainties over the course of inflation and Fed policies. Stocks have recovered since hitting a low in the middle of last month, but the S&P 500 remains down 15.7% for the year so far.
“Even though the market bottomed out in May, we will see another selloff at some point,” Nancy Tengler, managing director of Laffer Tengler Investments, wrote in a research note, “and some of us will feel worse than we thought. could because we thought it was over.”