On Wall Street, stock indices sharply fell on Thursday as investors fear that the U.S. central bank will raise interest rates more than expected, given that the economy continues to grow very strongly.
The Dow Jones weakened by 1.05 percent, to 33,027 points, while the S&P 500 slid 1.45 percent, to 3,822 points, and the Nasdaq index fell 2.18 percent, to 10,476 points. The indices lost all gains from the previous day, a consequence of the continued strong growth of the U.S. economy, which could lead the Fed to raise rates to higher levels than anticipated.
Namely, the final estimate showed that in the third quarter, the gross domestic product (GDP) grew by 3.2 percent on an annualized basis, more than initially estimated.
Labor market data, on the other hand, showed that last week the number of unemployment claims rose to 216,000, less than the expected 22,000. This data indicates that the economy and labor market remain very strong, which will continue to support high inflation.
This, in turn, means that the Fed could raise rates to higher levels than expected and that these levels could be maintained longer than anticipated.
“Strong economic indicators will prompt the Fed to keep its foot on the economic brake and continue tightening monetary policy. This means there is a risk of overdoing it with rate increases, which would have a strong impact on the economy,” explains Liz Ann Sonders, a strategist at Charles Schwab.
And while it is solidly growing this year, next year the economy could plunge into recession. – The market is transitioning from a phase of concern about how much the Fed will raise rates to a phase of concern about a recession next year in the U.S., but likely globally as well. This also means that earnings estimates for companies for next year are too high,” says Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management Company.
Due to the aggressive rate hikes by the Fed, the S&P 500 index is on track for its largest annual loss since the financial crisis of 2008. At this time of year, stock prices typically rise as investment funds and other large investors beautify their portfolios, which is customary at the end of the year. However, analysts say that this year, that otherwise typical price increase may be absent or very weak.
In China, very challenging
European stock markets traded cautiously on Friday morning as investors do not want to take risks, given that central banks will continue to raise interest rates due to high inflation, which will slow economic growth.
The STOXX 600 index of leading European stocks was almost unchanged at 9:30 AM compared to yesterday, when it fell. This morning, the London FTSE index weakened by 0.06 percent, to 7,465 points, and the Paris CAC by 0.07 percent, to 6,513 points. The Frankfurt DAX, on the other hand, strengthened by 0.07 percent, to 13,924 points.
And on Asian markets, stock prices fell after two days of growth. The MSCI Asia-Pacific index, excluding Japan, was down 1 percent around 9:30 AM. Meanwhile, on the Tokyo Stock Exchange, the Nikkei index weakened by about 1 percent, while stock prices in Shanghai, Australia, Hong Kong, and South Korea fell between 0.3 and 1.8 percent.
On Chinese markets, stock prices fell due to an increase in COVID-19 cases after authorities relaxed restrictive measures. Analysts say that the lifting of these measures is good for economic growth in the long term, but the coming months will be very challenging on both the health and economic fronts.
The Japanese Nikkei index is under pressure due to the fact that the core inflation rate in Japan reached 3.7 percent on an annualized basis in November, a new 40-year high. This confirms expectations that next year the Japanese central bank will continue to unwind stimulus measures. This process has already begun this week, when it relaxed control over bond yields.
