(Bloomberg) — Stocks faced a flurry of volatility, with traders weighing mixed economic numbers amid bets they won’t be enough to dissuade the Federal Reserve from easing the pace of tightening next week, as recently reported.
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The S&P 500 eased concerns as an unexpected drop in near-term inflation expectations and a warmer-than-expected reading of producer prices. Swaps still signaled that officials betting on markets would raise rates by 50 basis points on Wednesday after four consecutive 75 basis point hikes.
“Compared to where we were a year ago, we’re in a better place and headed in the right direction,” said Mike Loewengart of Morgan Stanley’s Global Investment Office. “Today’s warmer-than-expected report is unlikely to be enough to prompt the Fed to stick with a 75 basis point hike next week, but any negative news on the inflation front is a thorn in the side of both the Fed and investors.”
All eyes will be on Tuesday’s consumer inflation numbers ahead of the Fed’s decision. US central bankers, including Chairman Jerome Powell, have signaled that the pace of interest rate hikes is slowing, stressing that borrowing costs will continue to rise and remain restrictive for some time to beat inflation.
A combination of factors, including persistent inflationary pressures and higher interest rates, could mean the economic downturn widely expected in 2023 will be shallow but long-lasting, according to strategists at Bloomberg Intelligence. The squeeze on profits amid higher interest rates could reduce the S&P 500’s annual return to 5.7% in each of the next three years — half the pace of the 2010-2019 period.
While many investors are impatient for the Fed to implement its latest rate hike, history suggests they should be wary of doing so while inflation remains high, according to strategists at Bank of America Corp.
Analysis by Michael Hartnett and his team found that stocks have outperformed since the Fed stopped raising interest rates during inflationary periods over the past 30 years. However, during the period of high inflation in the 1970s and 1980s, stocks fell after the last rally, they wrote in the note. In the current cycle, they expect the Fed to raise rates for the last time in March 2023.
The International Monetary Fund, the World Bank and others have raised concerns about the deteriorating global outlook, while raising hopes that China’s reopening will support world growth. Kristalina Georgiyeva, managing director of the IMF, said that the indicators show the possibility of a further decline in global growth. The organization currently forecasts global growth to slow to 2.7% next year from 3.2%.
Some of the world’s biggest investors are predicting stocks will post low-double-digit gains next year, a relief after global shares suffered their worst loss since 2008.
Amid recent optimism that inflation has peaked and the Fed may soon begin to change its tone, 71% of respondents to a Bloomberg News survey expect stocks to rise, compared with 19% who predicted a decline. For those who saw gains, the average answer was 10% gain.
There were no borrowers willing to sell new investment-grade U.S. bonds on Friday, according to an informal survey of debt underwriters.
The market eagerly awaited producer price index data, a key reading of inflation, which came in warmer than expected. It’s unclear if the company, which stopped on Wednesday and Thursday, will return for another appearance next week, but there don’t seem to be many other deals for the rest of December.
Oil rose after President Vladimir Putin said Russia may cut production.
Some of the major movements in the markets are:
Shares
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The S&P 500 was little changed by 11:11 a.m. New York time
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The Nasdaq 100 rose 0.3%
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The Dow Jones Industrial Average was little changed
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Stoxx Europe 600 rose by 0.7%
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The MSCI World index rose 0.3%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro fell 0.2% to $1.0537
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The British pound rose 0.4% to $1.2288
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The Japanese yen was little changed at 136.60 per dollar
Cryptocurrencies
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Bitcoin was little changed at $17,174.48
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Ether fell 0.2% to $1,275.69
Bonds
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The 10-year Treasury yield rose eight basis points to 3.56%.
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Germany’s 10-year yield rose 11 basis points to 1.93%.
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Britain’s 10-year yield rose 9 basis points to 3.18%.
Commodity
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West Texas Intermediate crude oil rose 0.8% to $72.04 a barrel
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Gold futures rose 0.4% to $1,809.10 an ounce
This story was produced with assistance from Bloomberg Automation.
–With help from Yelena Popina.
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