(Bloomberg) — Stocks faced a lot of instability, with traders weighing mixed economic numbers amid bets they won’t be enough to sway the Federal Reserve from reducing the pace of tightening next week as recently signaled.
Most Read from Bloomberg
The S&P 500 wavered as an unexpected drop in short-term inflation expectations tempered worries with a hotter-than-expected producer-price reading. Swaps signaled markets betting officials will raise rates by 50 basis points Wednesday, following four consecutive 75 basis-point hikes.
“With traders on edge, any indication that prices remain elevated and that inflation is more sticky than currently believed, is a negative for markets,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “It is likely that the Fed will move ahead with their plans of reducing the rate hike down from 75 bps per meeting to 50 bps per meeting, but if there is any chance of a Santa Claus rally this year, it will hinge on the inflation data next Tuesday coming in lower than expected.”
On the eve of Wednesday’s Fed decision, all eyes will be on consumer inflation figures. US central bankers, including Chair Jerome Powell, have been signaling a slowdown in the pace of rate hikes while stressing borrowing costs will need to keep rising and remain restrictive for some time to beat inflation.
“Month-over-month PPI rising slightly and coming in just over expectations is yet another reminder of how sticky inflation is,” said Mike Loewengart at Morgan Stanley Global Investment Office. “Though keep in mind compared to where we were a year ago, we are in a better place and headed in the right direction. It’s unlikely today’s hotter-than-expected report would be enough to push the Fed to stick with the 75 basis point hikes next week, but any negative news on the inflation front is a thorn in the side of both the Fed and investors.”
The Fed is set to disappoint Wall Street as it keeps rates at their peak throughout 2023, dashing hopes markets have priced in for rate cuts in the second half and making a recession very likely.
Read: The S&P 500’s Next Record May Be Three Years Away: Taking Stock
While many investors are impatient for the Fed to deliver its last rate hike, history shows they should be wary of doing so while inflation remains elevated, according to Bank of America Corp. strategists.
An analysis by Michael Hartnett and his team showed that stocks outperformed after the Fed stopped increasing rates during periods of disinflation in the past 30 years. However, during the era of high inflation in the 1970s and 1980s, equities had fallen after the last hike, they wrote in a note. In the current cycle, they expect the Fed to raise rates for the last time in March 2023.
The International Monetary Fund, World Bank and others raised concerns about a worsening global outlook, while hopeful that China’s reopening will help support world growth. IMF Managing Director Kristalina Georgieva said indicators show further downgrades to global growth are likely. The institution currently forecasts global growth will be 2.7% next year, slowing from 3.2% this year.
Some of the world’s biggest investors predict that stocks will see low double-digit gains next year, which would bring relief after global equities suffered their worst loss since 2008.
Amid recent optimism that inflation has peaked — and that the Fed could soon start to change its tone — 71% of respondents in a Bloomberg News survey expect equities to rise, versus 19% forecasting declines. For those seeing gains, the average response was a 10% return.
There are no borrowers looking to sell fresh US investment-grade bonds on Friday, according to an informal survey of debt underwriters.
The market was anxiously awaiting producer price index data, a key reading of inflation, which came in hotter than expected. It’s unclear whether a company that stood down on Wednesday and Thursday will return for another look next week, but it appears there aren’t many other deals lined up for the remainder of December.
Elsewhere, oil climbed after President Vladimir Putin said Russia may cut its output.
Some of the main moves in markets:
Stocks
-
The S&P 500 was little changed as of 10:37 a.m. New York time
-
The Nasdaq 100 rose 0.1%
-
The Dow Jones Industrial Average fell 0.2%
-
The Stoxx Europe 600 rose 0.7%
-
The MSCI World index rose 0.3%
Currencies
-
The Bloomberg Dollar Spot Index was little changed
-
The euro fell 0.2% to $1.0537
-
The British pound rose 0.4% to $1.2286
-
The Japanese yen was little changed at 136.74 per dollar
Cryptocurrencies
-
Bitcoin was little changed at $17,183.42
-
Ether fell 0.2% to $1,276.28
Bonds
-
The yield on 10-year Treasuries advanced six basis points to 3.55%
-
Germany’s 10-year yield advanced 11 basis points to 1.93%
-
Britain’s 10-year yield advanced eight basis points to 3.17%
Commodities
-
West Texas Intermediate crude rose 1.3% to $72.40 a barrel
-
Gold futures rose 0.2% to $1,806 an ounce
This story was produced with the assistance of Bloomberg Automation.
Most Read from Bloomberg Businessweek
©2022 Bloomberg L.P.