Policymakers have a tough call, raising interest rates to curb inflation while avoiding a recession. Our head of markets explains what's moving share prices today.
More central bank tightening and a re-evaluation of prospects for the US economy have put the skids under global markets, with the likelihood of recession apparently increasing.
After a brief relief rally, US markets plunged once more as investors pondered the possibility of a policy mistake from the Federal Reserve.
The tightening process may have come at a time when the economy was beginning to cool slightly, as opposed to a year ago when it would clearly have been able to withstand the hikes which are currently coming through.
Indeed, there have been some questions raised as to whether the economy is quite as strong as the Fed is suggesting. Real estate data showed a 14.4% decline in housing starts despite a housing shortage, far in excess of expectations, while weekly jobless claims also rose.
Alongside recent data releases which have shown escalating inflation, declining consumer confidence and supply chain shortages, there are any number of economic data points which imply a weaker overall picture.
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This leads to the question of whether the Federal Reserve is losing the confidence of investors as it continues a fine balancing act in attempting to curb inflation without inducing recession. Even the latest interest rate rise could yet reveal that the central bank has been behind the curve for some months, which will make the task harder now that the inflationary horse has bolted.
At the same time, the Bank of England also joined the throng of tightening banks with another hike, amid renewed forecasts of inflation rising as high as 11% later this year. There was also a surprise rise from the Swiss National Bank for the first time in 15 years.
The deteriorating sentiment sent investors rushing for cover, resulting in more sharp declines. In the year to date, the flagship S&P500 has now declined by 23% and the Nasdaq by 32%. The Dow Jones is down by 17.6% and, if measured from its recent high earlier in the year, the index has lost 19%, putting it on the cusp of joining the other two indices in bear market territory.
Even the FTSE100, which has been one of the few global indices to carry the fight for most of this year is showing some early signs of capitulation. Despite a cautiously positive opening in early exchanges, the previous couple of bruising sessions have wiped out the hard-won gains of 2022, leaving the index down by 4.4% in the year to date.
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For the moment, the mood is clear. Investors globally are questioning whether any global growth is possible amid the current monetary shackles and are giving risk assets a wide berth at the slightest excuse.
The impending quarterly reporting season will add further colour to trading conditions on the ground, and the company comments on the immediate outlook will have particular resonance.
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