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Stocks & Futures Fall on Fed Rate-Hike Bets

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On Thursday, after high US inflation hardened expectations for more aggressive Federal Reserve monetary tightening that could trigger a recession, US equity futures fell along with stocks in Europe, and the dollar resumed its upward march. This came as a result of the Fed’s decision to leave interest rates unchanged last week.

The loss in the telecom sector, where Ericsson AB fell more than 10 percent after missing analysts’ quarterly profit projections, was a major contributor to the increase in the negative value of the Stoxx Europe 600 index, which was greater than 1 percent. The unanticipated reporting of a loss by the Swedish property company Samhallsbyggnadsbolaget I Norden AB resulted in a 15 percent decline for the stock price of real estate-related companies.

Contracts on the S&P 500 and the Nasdaq 100 fell by more than 1 percent apiece before to the start of the earnings season for the second quarter in the United States, which was kicked off on Thursday by JPMorgan Chase & Co. and Morgan Stanley. An Asian share index experienced its third loss in the last four days as the sell-off in China’s real estate development sector moved to the banking industry.

After the consumer-price index in the United States recorded a 9.1 percent annual increase, market participants altered their views toward a historic one percentage-point rise in Fed interest rates later this month. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, stated that “everything is in play” to address price concerns.

According to Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Ltd., “It is clear that central banks around the world are laser-focused on fighting the entrenched inflation they helped to create, growth-be-damned. US markets are pricing in faster Fed tightening, and a recession is on the way imminently.”

The value of the dollar continued to rise, and it is currently trading around its highest level in more than two years. The two-year maturities, which are more sensitive to upcoming Fed movements, led to a rise in Treasury rates, which rose overall. Since the year 2000, we are seeing the most severe case of a potential recession predictor known as an inversion between rates on two-year and 10-year bonds.

After briefly falling below $1 on Wednesday, the euro moved back toward $1 and European bonds plummeted after Bloomberg reported that the European Commission has lowered its growth projection and raised the inflation outlook for the common-currency region. Because Mario Draghi’s ruling coalition appeared to be on the verge of falling apart, the yield on Italy’s 10-year government bonds increased by more than 10 basis points, and the country’s equity benchmark performed poorly.

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The value of the yen dropped to a new 24-year low. The price of a barrel of Brent crude oil dropped by more than 2 percent, reaching almost $97. This price is close to being at its lowest point in the last four months. Bitcoin maintained its position below $20,000 despite the filing for bankruptcy by cryptocurrency lender Celsius Network, which weighed on sentiment.

The main concern for the markets is whether or not the most recent reading on US inflation reaches the highest point. The price of commodities has leveled off slightly recently after being driven up in part this year by supply interruptions connected to Russia’s involvement in the conflict in Ukraine. The figures on US producer inflation and employment that will be released later on Thursday could provide additional insight into the future of pricing and growth.

In an interview with Bloomberg Television, the president of the Federal Reserve Bank of Cleveland, Loretta Mester, stated that the consumer-price data was negative across the board and that the Federal Reserve will need to raise interest rates much above the neutral level. She went on to say that the numbers don’t point to a smaller increase than in June.

Swaps that reference Federal Reserve meetings are priced for the policy rate to peak at around 3.7 percent this December. This is an increase from the existing target range of 1.50 percent to 1.75 percent. Traders therefore anticipate that the Federal Reserve will begin decreasing interest rates in order to combat the downturn in economic activity. If increasing prices prove to be permanent and come along with a global economy that is faltering under rate hikes, then this might be poisonous for a variety of assets that are already nursing severe losses in the year 2022.

According to Danielle DiMartino Booth, chief strategist at Quill Intelligence, the markets could potentially be getting ahead of the Fed at this point in time. She stated that we need to move the discussion onto how long is the recession going to be, how deep it’s going to be.”

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