- Stocks Sink as Hawkish Bets Revive Recession Fears
- Treasury yield-curve inversion reaches a four-decade extreme
- Pound tumbles as BOE tells investors to rein in hike wagers
Stocks sank before Friday’s jobs data amid concern that a deeper recession could be in store with the Federal Reserve expected to hold rates at a higher level for longer to tame inflation.
The S&P 500 saw its fourth straight decline, dragged down by big tech as Treasury yields climbed. Apple Inc. tumbled over 4% and Amazon.com Inc. suffered its longest slide since 2019. A key segment of the Treasury curve reached new extremes of inversion, touching a level not seen since the 1980s when the Fed was aggressively tightening. Curve inversions have a track record of preceding economic downturns.
Swaps that reference future Fed meetings indicate an expected peak rate above 5.1% around mid-2023. Estimates briefly dropped below 5% on Wednesday. The benchmark rate currently sits in a range of 3.75% to 4%.
Markets are rightly more concerned with the ultimate level of rates rather than the pace of tightening, according to Mark Haefele, chief investment officer at UBS Global Wealth Management — who doesn’t believe the conditions are in place for a sustained stock rally.
“The Fed, along with other major central banks, looks likely to keep tightening rates until the first quarter of 2023,” Haefele noted. “Economic growth will likely continue to slow into the start of the new year, and global financial markets are vulnerable to stress while monetary policy continues to tighten. Such headwinds have yet to be fully reflected in earnings estimates or equity valuations.”
The pound slumped as the Bank of England told investors to rein in expectations for hikes.
European Central Bank President Christine Lagarde warned that a “mild recession” is possible, but that it wouldn’t be sufficient in itself to stem soaring prices. The comments are part of a raft of public appearances by ECB officials, as investors and analysts ponder the twin challenges of record price growth and a likely economic downturn, due largely to Russia’s invasion of Ukraine.