Major financial market indexes in America and Europe fell sharply on Friday after the news that the inflation rate in the United States was at its highest level in 40 years.
Posted at 10:00 a.m.
While investors were hoping for a further respite in inflation, after the one seen in April, the opposite turned out. The rise in consumer prices accelerated again in May in the United States to reach 8.6% over one year, against 8.3% the previous month.
As a result, the probability is now much higher that the American Federal Reserve (Fed) will decide to accentuate its policy of raising interest rates in order to control inflation. And this for the next few weeks.
“Bond yields have continued to rise this week. These movements are based on expectations of more pronounced monetary tightening to fight against inflation. At the same time, this leads to fears about economic growth and pulls the stock markets down,” note Desjardins Group economists in their weekly economic and financial situation bulletin, published on Friday.
“High inflation, a Fed that will raise rates further and an increased risk of a slowdown in the economy are what increasingly worries the stock and financial markets”, according to analyst Karl Haeling, of the bank. German LBBW, quoted by Agence France-Presse.
According to this analyst, stock market investors now expect the US Fed to raise its target rate by 50 basis points (0.5 percentage points) at each of its next three meetings, with the possibility of it rising as high as 3.5% by the middle of next year. The target range for the Fed’s federal funds rate these days is between 0.75% and 1%.
Worst week in New York since January
On the American stock exchange, Friday, the Dow Jones index ended down 2.7%, at 31,392 points, while the broader S&P 500 index fell 2.9%, at 3,900 points, and the NASDAQ index fell 3.5% to 11,340 points.
With this other sharp decline, the three main US stock market indexes recorded their worst week since January.
On the Canadian stock market, the S&P/TSX market index fell 1.4% on Friday to end the week at 20,274 points.
On the other side of the Atlantic, earlier in the day, all the European stock market indices had taken a nose dive, in particular those of Paris (- 2.7%), Frankfurt (- 3%) and London (- 2.1% ).
“The US stock market took a hit on the chin on Friday, with the S&P 500 index ending a week down 4%. In Canada, the S&P/TSX index held up better, with support from energy stocks and limited exposure to more volatile growth stocks,” said Martin Roberge, senior North American markets analyst at Canaccord Genuity at Montreal.
“Clearly, all eyes in the financial markets were on the US inflation statistics, their implications for the Fed and the economic outlook. While the Fed is expected to raise interest rates by 50 basis points (0.5 percentage points) next week, the probability of another hike of 75 basis points (0.75 percentage points) in July increased. Also, a pause in rate hikes starting in the fall seems increasingly unlikely. »
I continue to believe that equity markets have yet to fully price in a scenario of very slow economic growth and even recession. Hence my opinion that the S&P 500 index should fall back below the trough reached in May in the more or less short term.
Martin Roberge, Senior North American Markets Analyst at Canaccord Genuity
Meanwhile, the US economy is already showing mixed signals for the coming months. A report released on Friday indicates that US consumer confidence is deteriorating more than economists expected, mainly due to the sharp rise in gasoline prices.
This adds to several recent warnings from major retailers about their upcoming results as US consumers shift and slow spending due to inflation. However, consumer spending is at the heart of the American economy.
“Soaring energy and food prices, coupled with falling stock prices, is a toxic combination for consumer sentiment. The confidence index updated on Friday is also at a historic low, ”commented Ian Shepherdson, of the analysis firm Pantheon Macroeconomics, to AFP.
With Agence France-Presse