(Toronto and New York) Stocks fell on Thursday as investors refocused on the threat of runaway inflation and the economic hardship that will result from interest rates rising to levels not seen in more than 10 years, thus resuming a downward movement that has already sent Wall Street into a bear market.
Updated yesterday at 11:10 p.m.
The S&P 500 fell 3.3%, part of a global pullback that also saw European stocks post steep declines. With Thursday’s decline, the S&P 500 is now nearly 24% below its Jan. 3 high and on course for its worst quarter since 2008, when the economy was devastated by a global financial crisis.
The European Stoxx 600 index fell 2.5%, its seventh drop in eight days, and the same was true for the FTSE 100, in London, which lost 3.1%.
Thursday’s fall came a day after the Federal Reserve (Fed) announced its biggest rate hike in decades, a sign it is ready to inflict some economic pain to get inflation under control, others central banks following suit. The Bank of England announced its fifth consecutive interest rate hike on Thursday, and the Swiss central bank raised its interest rate for the first time in 15 years, a more aggressive move than many expected.
Central banks are raising borrowing costs to discourage spending, whether on new homes or auto loans, but the move is also slowing economic growth and threatening corporate profits.
Interest rates are rising rapidly alongside the Fed’s key rate, which is now in a range of 1.5% to 1.75% from near zero in March. Average mortgage rates have almost doubled this year — they rose from just over 3% to around 5.8% on Thursday. This is the highest level for 30-year fixed mortgages since 2008, according to Freddie Mac.
Shares of homebuilders, like KB Home and Lennar, fell as a result. On Thursday, they were down 8% and 6.5% respectively, losses that have seen them fall more than 40% since the start of the year.
And government bond yields, which underpin borrowing costs across the economy, are rising sharply this year as the central bank raises rates. On Thursday, the yield on 10-year Treasury bills was 3.2%, a level not seen in more than 10 years.
The Toronto Stock Exchange also down
The Toronto floor’s S&P/TSX Composite Index shed 607.50 points, or more than 3%, to end the session with 19,004.06 points. It now has a decline of 24% compared to the start of the year.
“To me, it’s all about the Federal Reserve,” said Allan Small, analyst at IA Private Wealth Management.
Fears about the rising cost of loans and its knock-on effect – starting with the housing market – are weighing on a range of indices. Meanwhile, concerns about whether the U.S. central bank’s rate hikes will tackle problems caused, in large part, by factors largely beyond its control, continue to mount, he said. underline.
“At the end of the day, I don’t think the fact that the Fed is rising so aggressively does anything for inflation – at least not yet,” Small said. Hence the even greater gloom about economic stability.
The recovery could be delayed
Analysts say the stock market is unlikely to recover until there are clear signs that inflation is beginning to get under control, which would relieve pressure on the Fed to raise quickly. its rates. Shares rallied briefly in late May, ending a seven-week losing streak as data appeared to show consumer price inflation had peaked, but selling resumed last week after a new consumer price index report showed inflation accelerating again, jumping 8.6% in May from a year earlier.
“Running inflation could be a killer of the equity market,” said Edward Moya, senior market analyst at OANDA, who notes that rising food, energy and housing prices are a burden. for businesses and consumers.
Fed Chairman Jerome Powell stressed at a press conference on Wednesday that causing a recession was not part of the central bank’s plan, but economists are skeptical.
Analysts at Deutsche Bank, for example, have called the central bank “too optimistic” in believing it can tame inflation without causing a recession.
“It is not until it is clear that the United States has experienced a spike in inflation that concerns about the path of Fed hikes are likely to subside significantly,” wrote Jane Foley. , strategist at Rabobank, in an email. “Meanwhile, market sentiment is likely to remain marked. »
Revisions to economic forecasts are coming quickly. Economists at IHS Markit, for example, now say that US gross domestic product likely grew at an annual rate of 0.8% in the second quarter. Just last week, they were forecasting growth of 2.4%.
With The Canadian Press
This article was originally published in the New York Times.