Yields Rise, Stocks Fall On Worries of Recession Before Breaking Inflation

Barry Adams
22 Sep, 2022
New York City

U.S. market averages declined for the third day in a row as recession worries resurfaced. 

Three back-to-back large-size rate hikes have stoked fears of economic slowdown deepening to a recession and lasting longer than previously anticipated. 

The Fed's five rate hikes over six months have not dented high inflation and investors are worried that the planned additional rate hikes may push the economy into a recession without appreciably taming inflation. 

Following the footsteps of the U.S. Federal Reserve, central banks in Norway, U.K. and Switzerland also lifted key rates as policymakers intensified efforts to combat 4-decade high inflation and end the era of negative rates.  

However, the Bank of Japan held its negative 0.1% rate and Turkey lowered its key repo rate by 1.0% to 12.0% despite the annual inflation raging at 80%.  

The S&P 500 index fell 0.8% to 3,767.99 and the Nasdaq Composite index eased 1.4% to 11,066.81.   

Crude oil advanced 55 cents to $83.41 a barrel and natural gas edged down56 cents to $7.21 a thermal unit. 

The yields on U.S. Treasuries continued to advance as investors factor in future rate hikes as rate increases over the last six months are having a minimal impact on sky-high inflation. 

The yield of 2-year Treasury notes inched up to 4.12%, 10-year notes increased to 3.71% and 30-year bonds rose to 3.64%. 

 

Weekly Jobless Claims 

Initial unemployment claims increased to 213,000 for the week ended Sept 17 and claims for the previous week were revised down to 210,000. 

 

Movers: Accenture, Darden, FedEx, KB Home, Lennar, Steelcase 

Accenture Plc edged down 1.2% after the information services company reported in-line revenues and earnings and increased its quarterly dividend and stock repurchase. 

Darden, the parent of Olive Garden and Seasons 52, dropped 4.4% after the company reported revenue increase largely reflecting price increase and reiterated its fiscal year 2023 outlook. 

FedEx Corporation increased 0.9% after the company announced fiscal cost savings between $2.2 billion and $2.27 billion and added that it plans to hike parcel delivery rates by 6.9%. 

KB Home declined 5% after the company reported lower than expected quarterly revenues but net income rose after the company delivered 6% more homes. 

Lennar Corp rose 1.9% after the home builder reported mixed quarterly results and net income increased at a slower pace of 4% despite the company delivering 13% more homes. 

Steelcase Inc plunged 10% after the company said it plans to cut $20 million annual costs and lay off up to 180 salaried staff. 

 

European Markets Drop On Future Rate Hike Worries 

European markets opened lower and accelerated declines following the lower U.S. stocks after the Federal Reserve delivered its third large-size rate hike. 

The Bank of England in a 3-way split decision lifted its rate and the Norges Bank revised its rate higher in a unanimous decision. 

European markets are not only facing higher energy costs but also confronting positive real rates for the first time after more than a decade of negative rates. 

Investors are worried that the central banks, despite the recent rate hikes and hawkish rhetoric, are lagging inflation by a wide margin. 

Real rates are still very low and the euro zone and the UK are still operating at real negative rates. 

The DAX index fell 1.4% to 12,593.40, the CAC-40 index dropped 0.8% to 5,981.60 and the FTSE 100 index declined 5.11 points or 0.07% to 7,232.54. 

 

Switzerland Ends Negative Rate Era 

The Swiss National Bank raised its key lending rate by 75 basis points and ended the era of negative rates prevailing since early 2015. 

The central bank also forecasted rates are likely to go higher as inflation is hovering near a three-decade high. 

The SNB lifted its inflation outlook to 3.0% from 2.8% for 2022, and to 2.4% from 1.9% in 2023  and to 1.7% from 1.6%in 2024. 

Consumer inflation in August jumped 3.5%, record high since August 1993.  

 

Bank of England Lifts Rates by 0.5% 

The Bank of England lifted its key lending rate by 50 basis points as the central bank intensified its efforts to tame sky-high inflation.  

The reference lending rate was revised to 2.25% from 1.75%, the seventh rate hike in a row lifted the rate to the highest not seen since November 2008.

The central bank lowered its third quarter economic growth estimate to a decline of 0.1% from the 0.4% growth estimated in August. 

The Bank of England also lowered its inflation projection to 10% for the next few months before easing after the government issued the Energy Price guarantee . 

 

Norway Signals Nearing Rate Peak 

The Norges Bank of Norway lifted its reference rate by 50 basis points to 2.25%, the level last seen in 2011. 

The central bank however said future rate hikes are likely to be "moderate" as the higher rates are having an impact on the economy. 

The bank is likely to lift rates again at its next meeting in November and rates are likely to stay there for a while. 

The rates are likely to stay near 3% through out the winter as high inflation is expected to persist for a while.