September 23, 2022
By DAMIAN J. TROISE and ALEX VEIGA AP Business Writers
Markets around the world have been sold off due to growing signs that the global economy is weakening, even as central banks increase the pressure even more with further interest rate hikes.
The Dow Jones Industrial Average closed Friday at the lowest point of the year. The S&P 500 fell 1.7%, close to the low of 2022.
Energy prices also closed sharply as traders are concerned about a possible recession.
Treasury yields, which affect rates on mortgages and other types of loans, remained at their multi-year highs. UK government bond yields surged after that country’s new government announced a sweeping tax cut plan.
European equities fell just as sharply or more after preliminary data suggested trading activity had had the worst monthly contraction since the beginning of 2021. To increase the pressure, a new plan to cut taxes was announced in London, which it pushed UK yields up because it could eventually force its central bank to hike rates even more drastically.
The Federal Reserve and other central banks around the world aggressively hiked interest rates this week in hopes of reducing high inflation, with bigger hikes promised for the future. But such moves also hold back their economies, threatening recessions due to slowing global growth. In addition to Friday’s disheartening data on European economic activity, a separate report suggests that U.S. activity is also still shrinking, albeit not as severely as in previous months.
“Financial markets are now fully absorbing the Fed’s harsh message that there will be no retreat from fighting inflation,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research report.
Crude oil prices have fallen to their lowest levels since the beginning of this year on fears that a weaker global economy will consume less fuel. Cryptocurrency prices have also dropped dramatically as higher interest rates tend to hit hardest on investments that appear to be the most expensive or riskiest.
Gold also fell during the global rout, as bonds that pay higher yields make investments that pay no interest less attractive. Meanwhile, the US dollar moved sharply higher against other currencies. This can hurt the profits of US companies with many overseas businesses, as well as put much of the developing world under financial pressure.
The Dow Jones Industrial Average was down 505 points, or 1.7%, to 29,572 and the Nasdaq was down 1.9% at 3:43 pm Eastern. Shares of smaller companies did even worse. The Russell 2000 fell 3%. US crude oil prices fell 5.7% and weighed heavily on energy stocks.
More than 90% of the shares of the S&P 500 were in the red, with technology companies, retailers and banks among the heaviest weights of the benchmark index. The major indices are catching up with their fifth weekly loss in six weeks.
The Federal Reserve raised its benchmark rate on Wednesday, which affects many consumer and business loans, in a range from 3% to 3.25%. It was practically zero at the beginning of the year. The Fed also released a forecast that its benchmark rate could be 4.4% by the end of the year, a point higher than expected in June.
Treasury yields rose to multi-year highs as interest rates rose. The 2-year Treasury yield, which tends to follow expectations for Federal Reserve action, rose to 4.19% from 4.12% at the end of Thursday. It is trading at its highest level since 2007. The 10-year Treasury yield, which affects mortgage rates, slipped to 3.68% from 3.71%.
The higher rates mean Goldman Sachs strategists say most of their clients now see a “hard landing” pushing the economy down as inevitable. The question for them is only about the timing, extent and duration of a potential recession.
Higher interest rates hurt all types of investments, but stocks could remain stable as long as corporate profits grow strongly. The problem is that many analysts are starting to cut their forecasts for upcoming earnings due to higher rates and concerns 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, chief global strategist at LPL Financial.
In the US, the job market has remained remarkably strong and many analysts believe the economy grew in the summer quarter after contracting in the first six months of the year. But encouraging signs also suggest that the Fed may need to raise rates further to achieve the cooling needed to bring down inflation.
Some key areas of the economy are already weakening. Mortgage rates hit a 14-year high, causing existing home sales to drop by 20% over the past year. But other areas that do better when rates are low are also suffering.
In Europe, meanwhile, the already fragile economy is facing the effects of the war on its eastern front following the Russian 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 plunge into a recession. And in Asia, the Chinese economy is grappling with still stringent measures aimed at limiting COVID infections that also harm businesses.
While Friday’s economic reports were daunting, few on Wall Street saw them as enough to get the Fed and other central banks to soften their stance on rate hikes. So they only reinforced fears that rates will continue to rise in the face of the already slowing economies.
Economics writer Christopher Rugaber and business writers Joe McDonald and Matt Ott contributed to this report.