US stocks headed for the worst week since March as anxiety rose that central banks will have to ratchet rates higher to tamp down inflation. Treasuries led a rally in bonds on bets that excessive tightening will bring on sharp economic downturns.
(Bloomberg) — US stocks headed for the worst week since March as anxiety rose that central banks will have to ratchet rates higher to tamp down inflation. Treasuries led a rally in bonds on bets that excessive tightening will bring on sharp economic downturns.
The technology-heavy Nasdaq 100 dropped as much as 1.5% during the morning session as chipmakers including Marvell Technology Inc. and GlobalFoundries Inc. slumped. The yield on the policy-sensitive two-year bond fell roughly 10 basis points on a read of June manufacturing activity.
The second-quarter stock rally is fraying under the threat of more rate hikes and fears that the full economic impact of aggressive central bank policy has yet to be felt. Federal Reserve Chair Jerome Powell said the US may need one or two more rate increases in 2023. “Getting inflation down is Job One, inflation is too high,” Atlanta Fed President Raphael Bostic said at an event Friday.
Treasury Secretary Janet Yellen sought to temper concerns over a US recession, she acknowledged the risk and said a consumer-spending slowdown was needed. Meanwhile, the US manufacturing purchasing managers index fell to 46.3 in June from 48.4 the prior period, the lowest reading since December.
“There is consistency throughout the global economy in at least one regard — manufacturing remains in a recessionary mode,” Ian Lyngen at BMO Capital Markets said.
“Translating this to US monetary policy is much more challenging than it might be overseas,” he wrote in a note to clients. “We don’t think this data has immediate implications for the FOMC’s July decision — for that we’ll look to NFP and CPI. Nonetheless, it was a disappointing print.”
US Treasuries yields fell by as much as 10 basis points. The inverted spread between the two- and 10-year bond widened to more than 1% — such inversions are considered a recessionary signal.
Scott Ladner, chief investment officer at Horizon Investments, said the bonds rally is being driven by “growth fears with European flash PMIs coming in soft this morning,” adding that there’s a bit of “breath-taking after the last few weeks of very strong risk asset performance.”
Germany’s economic activity lost much more momentum than anticipated in June, driven by a slowdown in services and sustained weakness at the country’s factories, according to business surveys by S&P Global. Separate data for France showed its economy probably slumped in the three months through June. The euro fell sharply following the figures.
Read more: Euro-Zone Activity Almost Stalls as Recession Rebound Fades
Concern about the economic outlook was reflected in a rotation into bonds and out of stocks in weekly flow data. Investors yanked $5 billion from global equity funds in the week through Wednesday and added $5.4 billion to bonds.
US stocks face more downside than upside over the next two months as banks and property firms “still have bad recession vibes,” according to the note from Bank of America strategists citing EPFR Global data.
Read more: Bonds Rally, Euro Falls on Fears Economy Is Starting to ‘Buckle’
On Thursday the Bank of England unexpectedly raised its benchmark interest rate by a half percentage point and warned it may have to hike again, casting doubt over whether it can engineer a soft economic landing. Money markets on Friday fully priced a terminal policy rate of 6.25% in February, which would be the highest level in more than two decades.
The US dollar and gold futures climbed.
Key events this week:
- Fed Bank of St. Louis President James Bullard speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.6% as of 10:46 a.m. New York time
- The Nasdaq 100 fell 0.9%
- The Dow Jones Industrial Average fell 0.5%
- The Stoxx Europe 600 was little changed
- The MSCI World index fell 0.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.4%
- The euro fell 0.7% to $1.0883
- The British pound fell 0.3% to $1.2709
- The Japanese yen fell 0.4% to 143.65 per dollar
Cryptocurrencies
- Bitcoin was little changed at $30,166.53
- Ether fell 0.5% to $1,878.95
Bonds
- The yield on 10-year Treasuries declined six basis points to 3.74%
- Germany’s 10-year yield declined 15 basis points to 2.34%
- Britain’s 10-year yield declined seven basis points to 4.30%
Commodities
- West Texas Intermediate crude fell 1.5% to $68.50 a barrel
- Gold futures rose 0.7% to $1,937.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Mark Tannenbaum, Michael Mackenzie, Denitsa Tsekova and Cecile Gutscher.
(A prior version corrected the index name for the Russell 2000.)
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