Friday’s choppy trading on the New York Stock Exchange ended with broad declines in stocks after a new report showed inflation slowing less than expected, just days before the Fed is expected to Federal raise interest rates again.
The S&P 500 index and the Nasdaq index each fell 0.7%, while the Dow Jones index fell 0.9%. Smaller company stocks fell further, dragging the Russell 2000 Index down 1.2%. The indices marked their first week of losses in the last three.
The US government reported that wholesale prices were 7.4% higher in November than a year earlier. That’s a slowdown from wholesale inflation of 8.1% year-on-year in October, but still slightly worse than economists had expected.
“There is a sense that inflation has plateaued, but it remains difficult to control and the Federal Reserve will most likely have to push harder,” said Quincy Krosby, chief investment strategist at LPL Financial.
High inflation in the country, along with the Federal Reserve’s response to it, have been the main reasons for Wall Street’s painful slide this year. Stock markets have recouped some of their losses recently, as inflation has slowed since it peaked in mid-year. But it’s still too high, raising the risk that the Federal Reserve will have to keep raising interest rates to fully control it.
Treasury yields rose as traders increased their bets on the level to which the Federal Reserve will ultimately raise interest rates. The central bank has already raised its overnight interest rate to a range of between 3.75% and 4%, from practically zero in March.
His next decision on the matter is scheduled for next week, and the general expectation is that he will raise rates another half a percentage point.
Higher rates hurt the economy by making loans to businesses and households more expensive, forcing them to cut spending. If they go too high, they can trigger a recession. They also drag down the prices of shares and all kinds of investments.
Another report released on Friday showed that US households expect lower inflation ahead. This is key for the Federal Reserve, which wants to avoid a vicious cycle in which households rush to buy for fear that prices will continue to rise. This buying activity only fuels inflation.
According to the University of Michigan survey, households forecast inflation of 4.6% for next year. It is the lowest figure in the last 15 months, although it is still well above that of two years ago. Longer-term inflation expectations remain stuck in the 2.9-3.1% range, where they have been for 16 of the past 17 months.
The last big inflation data before the Federal Reserve’s next decision comes Tuesday, when economists expect the consumer price index to show inflation slowed from 7.7% in October to 7.3% last month. last month.
“The two biggest questions for next year are: how fast will inflation fall? And how much will it have to fall before the Fed stops tightening?” FX strategists wrote in a BofA Global Research report. “We are concerned that the markets are too bullish on both counts.”
About 75% of stocks in the S&P 500 closed lower on Friday, with healthcare, technology and energy the biggest drag on the market. The index fell 29.13 points, to close at 3,934.38. It has lost 3.4% in the week and 17.5% so far this year.
The Dow fell 305.02 points, to settle at 33,476.46, while the Nasdaq lost 77.39 units and closed at 11,004.62. The Russell 2000 dropped 21.63 points to 1,796.66.
The yield on the 2-year Treasury note, which usually tracks the Federal Reserve’s expectations, rose to 4.36% from 4.26% shortly before the release of the inflation report on Friday. Late on Thursday it stood at 4.31%.
The yield on the 10-year Treasury note, which determines interest rates on mortgages and other loans, rose to 3.58% from 3.49%.