- The battle over whether the recession will force the Fed to cut rates is simmering
- Business outlook, results point to slowing economy
- Yield curve “inversion” flash recession ahead
NEW YORK, Jan. 25 (Reuters) – Global stock markets fell on Wednesday as poor corporate earnings fueled recession fears, as did the continued reversal in short- and long-term government bond yields – a harbinger of economic downturn.
But major indices on Wall Street offset the losses sharply, suggesting many believe a downturn, coupled with rising unemployment, will prompt the Federal Reserve to reverse its aggressive monetary tightening and cut interest rates soon.
Yields on short-term government bonds have been inverted for some time, or higher than those on longer-term government debt. The 3-month and 10-year yield curve narrowed Wednesday, but was still deeply inverted at -123.5 basis points.
“Every recession has been preceded by some kind of yield curve inversion,” said Joseph LaVorgna, chief US economist at SMBC Nikko Securities in New York.
But with the Fed’s overnight interest rate at 4.25% – 4.5%, it is “restrictive” and is slowing growth, possibly causing major job losses in the next two months, leading the US central bank to raise interest rates. will decrease mid-year. he said.
“I could be right about the economy and the job market, but the Fed can still say we’re going to drive the economy down until there’s no more fear that inflation will flare up again.”
Corporate America also signaled trouble ahead. Boeing’s dismal results on Wednesday amid ongoing supply chain restrictions added to concerns about slower growth, while Microsoft Corp. (MSFT.O) warned its customers to be cautious about spending in an uncertain economy in a gloomy climate. outlook at the end of Tuesday.
Futures are pricing in a 94.7% chance of a 25 basis point gain when February policymakers end a two-day meeting on Feb. 1.
The yield on 10-year Treasury bills fell 2.2 basis points to 3.445%, well below the Fed’s expectation that the target rate will remain above 5% next year.
Two in three Americans say they are more concerned about paying bills than saving for their financial future, said Johan Grahn, head of ETFs at Allianz Investment Management in Minneapolis, citing a survey by his firm.
While the U.S. central bank will make some changes, “they aren’t significant enough to drive the Fed away from its stated marching orders,” Grahn said. “The enemy is inflation, the catalyst is the job market and that’s what it comes down to.”
Wall Street closed, little changed. The Dow Jones Industrial Average (.DJI) was up 0.03%, the S&P 500 (.SPX) was down 0.02% and the Nasdaq Composite (.IXIC) was down 0.18% after losing more than 2% earlier.
Trading in European equities was lackluster as signs of an improving economic outlook in the Eurozone fueled concerns about further rate hikes.
The broad pan-European STOXX 600 index (.STOXX) lost 0.29% and MSCI’s measure of global equity performance (.MIWD00000PUS) closed 0.05% to hit a new five-month closing high after much of the day acted lower.
Markets are being battered by the fastest monetary policy tightening since the 1980s.
The Bank of Canada indicated it was likely to halt further hikes after raising its key interest rate to 4.5% on Wednesday.
Earlier, the Australian dollar hit a five-month high as rising inflation data bolstered arguments for another Reserve Bank of Australia (RBA) rate hike next month.
The Canadian dollar fell 0.11% against the greenback at 1.34 per dollar following the central bank’s outlook.
The Australian dollar rose to $0.7123 after the latest inflation numbers. The Australian currency is up 1.6% this week and is poised for its biggest weekly gain in more than two months.
The euro rose 0.26% to $1.0913.
In Asia, MSCI’s broadest index of Asia Pacific equities outside Japan (.MIAPJ0000PUS) reached a seven-month high. Trading volume was low as the Chinese and Taiwanese markets were still closed for the Lunar New Year holiday.
Data showing that German business morale improved in January did little to push the single currency higher for now.
Germany’s Ifo Institute said its business climate index rose to 90.2, in line with consensus, according to a Reuters poll of analysts, and up from 88.6 in December.
Oil prices remained broadly unchanged after government data showed a smaller-than-expected increase in US crude inventories, counterbalancing Tuesday’s weak economic data.
Brent crude futures settled at $86.12 a barrel, down one cent, while US West Texas Intermediate (WTI) crude futures closed at $80.15 a barrel, down two cents.
Gold reversed course to move higher as the dollar weakened and investors kept a close eye on a slew of upcoming US economic data that could impact the Fed’s policy meeting next week.
US gold futures rose 0.4% to $1,942.60 an ounce.
Edited by Bernadette Baum, William Maclean and Deepa Babington
Our Standards: The Thomson Reuters Principles of Trust.