Updated at 11:26AM EST
US stocks fell strongly on Friday, while the dollar resumed its rally in foreign exchange markets and Treasury yields tested new highs, as investors headed an increasingly narrow path between slowing global growth and hawkish central bank signals.
Strong data from China on Friday, which posted better-than-expected gains in retail sales and industrial production during the month of August, failed to offset global recession fears voiced yesterday by the World Bank, which it said is experiencing the biggest slowdown since the early 1970s. Adding that “a moderate blow to the global economy over the next year may push it into recession.”
“To achieve lower inflation, currency stability, and faster growth, policymakers can shift their focus from reducing consumption to boosting production,” World Bank President David Malpass said. “Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical to growth and poverty reduction.”
The IMF wasn’t quite so gloomy, noting that it was too early to make a call about a 2023 recession, but it nonetheless trimmed its growth forecasts for this year and next ahead of a more detailed fall report due next month.
Meanwhile, near-term warnings about extended supply chain disruptions from General Electric, as well as a poor near-term outlook from FedEx, only reflect concerns that support the recession outlook.
Meanwhile, interest rate hikes from the Federal Reserve, the Bank of England and the European Central Bank have investors worried that weak fundamentals will be made worse by higher borrowing costs, pushing them into safer assets like the US dollar.
The dollar index, which measures the greenback against a basket of six world currencies, rose 0.2% in the evening session to 109.958, pushing the pound to its lowest level since March 1985.
The odds of a move 100 basis points from the Fed next week, which will be the largest since 1984, are steady at around 16%, based on data reflected in CME Group’s FedWatch, with the potential to increase bets on subsequent increases. The federal funds rate is set to be between 4.25% and 4.5% by the end of February.
Bond markets are warning of a recession as well, with 2-year bond yields rising to 3.903% in overnight trading, consolidating the difference on 10-year notes at 43.4 basis points.
The key reading of consumer confidence, due today at 10:00 AM ET, could provide more details on whether the greater part of the domestic economy is ready to contribute to growth prospects over the coming months.
With gas prices plunging and stock prices continuing north of their lows in early June, economists expected to see a strong jump in the main body of the University of Michigan benchmark for September, but the measure only rose by less than a point to 59.5 — compared to a scale as high as 70.6 prior to the Russian invasion of Ukraine. earlier this year.
The survey also indicated that the one-year inflation outlook was unchanged at 4.6%, a critical number given the headwinds seen in US retail sales – despite lower gas prices – and surprisingly fast rates for both the headline and core readings for August.
“The Fed may achieve its target of a soft landing for Goldilocks because consumer demand is neither too hot nor too cold,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “Consumers are showing amazing resilience as terms of purchase for key ticket items are better than their June lows but still look weak.”
“The fall in gas prices would boost consumer spending in the short term, but the tightening of financial conditions creates increased risks for the year ahead,” he added.
On Wall Street, the S&P 500 was down 48.5 points in the opening hour of trading while the Dow Jones Industrial Average was down 320 points. The technology-focused Nasdaq fell 195 points.
European shares posted a 1.48% drop in late Frankfurt trading, following a 1.4% drop for the previous MSCI Japan index in Asia.
FedEx (FDX) Shares were the main driver early on, tumbling nearly 23% after the world’s largest package delivery group withdrew its full-year earnings guidance after a surprise first-quarter update after trading closed Thursday.
General Electric (GE) Stocks fell 4.8% after the industry group warned that ongoing disruptions in the supply chain could reduce its closely-tracked cash flow forecast.
Uber technologies (Uber) It fell 4.5% after a New York Times report confirmed a cybersecurity breach of ride-sharing group’s internal IT systems.