US stocks slipped in volatile trading on Wednesday and Treasuries rallied after retail sales and manufacturing output declined in December by more than analysts expected, suggesting to some investors that the world’s biggest economy is already in recession.
Wall Street’s blue-chip S&P 500 was down 1.1 per cent in afternoon trading, erasing earlier gains as it was dragged lower by all sectors, with consumer non-cyclicals posting the largest declines. The tech-heavy Nasdaq Composite was 0.8 per cent lower, having earlier risen 0.8 per cent.
US government bonds rallied, meanwhile, with the yield on 10-year Treasuries falling 0.15 percentage points to 3.39 per cent, down from a peak of 4.24 per cent in late October. Bond yields move inversely to prices.
The dollar touched a seven-month low.
The moves came after US retail sales fell 1.1 per cent in December from the previous month, data from the Department of Commerce showed. Economists polled by Reuters predicted a 0.8 per cent decline.
Analysts at ING argued that “such poor retail sales”, on top of separate data out on Wednesday that showed US industrial production fell 0.7 per cent in December compared with the previous month, suggest “that recession is on its way and we could in fact already be in it”.
There was better news for investors on the inflation front, with the producer price index, which tracks the prices businesses receive for their goods and services, falling 0.5 per cent month on month — more than the 0.1 per cent drop forecast by economists.
Services inflation rose “only” 0.1 per cent, meanwhile, sending “a more dovish signal about price pressures in the wage-sensitive parts of the economy”, according to analysts at Morgan Stanley.
The US bank earlier this week doubled down on its bearishness on the dollar, which soared in the first half of 2022 as US interest rates climbed in response to surging price growth. A measure of the dollar’s strength against a basket of six peers fell 0.2 per cent on Wednesday, with the currency having weakened 9.8 per cent over the past three months.
Recession fears may be on the rise in the US, but some investors are growing increasingly confident that central banks might soon pause their rate rises now that headline inflation in their view has peaked. China’s economic reopening has at the same time offered support to the idea that a slowdown in the US and Europe this year will be less pronounced than first thought.
Gita Gopinath, deputy managing director of the IMF, signalled this week that the fund would upgrade its economic forecasts, while Germany’s chancellor, Olaf Scholz, told Bloomberg that the eurozone’s largest economy would avoid a recession.
Rates markets are pricing in a roughly 90 per cent chance that the Fed raises its main policy rate by a quarter percentage point when it meets at the start of February, following a half percentage point rise in December.
“If Fed members are leaning towards 50 [basis points], they will need to make some public noises and drop the breadcrumbs,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “The ball is in the Fed’s court.”
Interest rates may be closer to peaking, but the effects of last year’s aggressive monetary tightening, when US borrowing costs rose about 4.25 percentage points, are only just beginning to show up in corporate results.
Analysts at S&P Global said they expected the effect from the “fastest pace of rate hikes in recent history to increasingly show in issuers’ operating performance and trading outlooks” as fourth-quarter earnings were released over the next few weeks.
Elsewhere, the Bank of Japan opted against a further tweak to its yield curve control measures, pushing stocks higher and sending the yen lower against the dollar. The yield on 10-year Japanese bonds fell to 0.43 per cent from 0.5 per cent, while Japanese government bond swaps, which provide a hint of where markets expect yields to end up, fell to 0.81 per cent from 0.91 per cent.
Hong Kong’s Hang Seng index rose 0.5 per cent and China’s CSI 300 shed 0.2 per cent.
Europe’s Stoxx 600 added 0.2 per cent, while Germany’s Dax traded flat. London’s FTSE 100 also traded in a tight range, slightly below a record high, as UK inflation slowed for the second month in a row, declining to an annual pace of 10.5 per cent in December from a peak of 11.1 per cent in October. Sterling gained 0.4 per cent against the dollar to $1.23.
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