U.S. stocks stabilized on Wednesday after the worst selloff on Wall Street since June 2020, as warmer-than-expected inflation data fueled bets on more aggressive interest rate hikes by the Federal Reserve.
The broad S&P 500 and the tech-heavy Nasdaq Composite closed up 0.3% and 0.7% respectively. The dollar index, which measures the currency against a basket of peers and rose sharply in the previous session, slipped as much as 0.5% before recovering for a drop of 0.1%.
The moves came after the S&P posted its biggest decline since the early days of the coronavirus pandemic, falling 4.3% on Tuesday on the back of higher-than-expected inflation for August. The Nasdaq closed down 5.2%.
Consumer prices in the world’s largest economy rose 0.1% in August from the previous month, official data showed, against expectations of a 0.1% decline. The annual rate came in at 8.3%, down from July’s figure of 8.5% but above economists’ estimate of 8.1%.
The inflation report prompted investors to raise their expectations of how aggressively the Fed would raise borrowing costs, with futures markets now pricing in more than a one-in-three chance of the US central bank raising benchmarks. rate of a full percentage point this month. . A move of this magnitude would follow two consecutive increases of 0.75 percentage points.
Markets now expect the Fed’s main interest rate to peak at around 4.3% in March 2023, an increase of around 0.3 percentage points since Monday.
“Two historically outsized hikes this summer appear to have had an immediate impact on the weaker-than-expected inflation landscape, leading markets to believe the Fed may be forced to make the hike of the century,” JPMorgan strategists said.
US government bonds were also more stable on Wednesday after the yield on the policy-sensitive two-year Treasury rose sharply to its highest level since October 2007 in the previous session. The yield added 0.04 percentage point on Wednesday to 3.80% as the price of the debt instrument fell slightly.
“Volatility and concerns about higher rates will persist,” said Patrick Spencer, vice president of equities at Baird. “We have the interest rate decision from the Fed next week and they were so hawkish at [last month’s Jackson Hole economic symposium]. It will keep people on the sidelines.
Europe’s Stoxx 600 stock index fell 0.9%, extending Tuesday’s session losses. London’s FTSE 100 lost 1.5%, although UK inflation data for August was colder than expected. In Asian markets, the Hong Kong Hang Seng index closed down 2.5%, while the Japanese Topix fell 2%.
New data on Wednesday showed the UK’s inflation rate returned to single digits in August, hitting a lower-than-expected 9.9% year-on-year from 10.1% in July.
Economists predict the country’s inflation rate will hover around double digits through the fall after Prime Minister Liz Truss pledged to protect households from rising gasoline prices.
In currencies, the yen fell as low as ¥144.95 to the dollar, around its lowest level in 24 years, before rebounding after the Bank of Japan conducted a “rate check” with global banks , in what is often seen as a precursor to intervention. to ease currency volatility.