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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

FTSE 100 slide as recession fears weigh on markets – as it happened

Inflation United States Recession Jerome Powell Target (Organization) Monetary Policy NYSE
The London Stock Exchange in the City of London.
The London Stock Exchange in the City of London. Photograph: Kirsty O’Connor/PA

Closing summary

Global finance leaders should prepare for multiple inflationary shocks, the head of the International Monetary Fund has warned, as fears of a global economic downturn continue to hit markets around the world.

The IMF’s managing director, Kristalina Georgieva, said it is becoming harder for central banks to bring down inflation without causing recessions.

Speaking to Reuters at the sidelines of a meeting of G7 finance ministers and central bank chiefs in Germany, Georgieva cited mounting pressures on energy and food prices from Russia’s war in Ukraine, and the supply chain disruption and cost pressures caused by China’s zero-Covid policies.

“I think what we need to start getting more comfortable with is, that may not be the last shock,” Georgieva said, adding that the Omicron outbreak last year had shown that inflation would not be a “transitory” one time shock.

London stock markets tumbled into the red on Thursday, with blue chip shares on track for its biggest one-day drop in two months. The FTSE 100 index is down 163 points or 2% in afternoon trading at 7274 points.

The pan-European Stoxx 600 index is down 1.3% with personal care companies, food and beverage companies, tech stocks and retailers all weakening.

Wall Street has opened lower, a day after its worst selloff in nearly two years. as major retailers reported that rising inflation was hitting consumer spending and eating into their profit margins.

The Dow Jones industrial average is down 335 points, or 1%, at 31,154, on top of Wednesday’s 3.6% slump.

Department store chain Kohl’s slashed its profit and sales outlook, echoing Target and Walmart earlier this week.

“The year has started out below our expectations,” said Michelle Gass, Kohl’s chief executive officer, adding that:

“sales considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment.”

US jobless claims rose for the third week in a row, with 218,000 Americans seeking unemployment support last week. A survey of manufacturers in the Philadelphia region showed that growth almost stalled this month, as rising costs hit factories.

Fiona Cincotta, senior financial markets analyst at City Index.

“The reality is no matter which way your turn, warnings signs are flashing.”

Inflation hit confidence at UK factories too, where investment plans remain weak, according to the CBI’s latest industrial trends reports. The number of manufacturers planning to lift their own prices remained near a record high.

Sri Lanka has defaulted for the first time since independence in 1948, as its economic crisis deepens and inflation surges higher.

Sri Lanka’s central bank confirmed today it had missed a deadline for $78m of foreign debt repayments on two sovereign bonds, as a 30-day grace period expired.

In other news....

Unions have called on the government to take urgent action to fix a “whopping pensions gap”, as research showed women working in many industries have half the retirement savings of men.

The chief executive of National Grid has weighed into the row over whether to introduce a windfall tax on North Sea oil and gas producers, claiming it would hit investment in renewables and harm customers.

Royal Mail has warned that it is likely to raise prices again for stamps and letters, as part of efforts to combat rising costs and offset a post-pandemic slowdown in parcel deliveries. Shares have fallen over 12%, after it missed profit forecasts.

A battle is shaping up between major retailers over whether the UK should introduce an online sales tax, with Sainsbury’s demanding it to help revive struggling high streets while M&S argues it would have the opposite effect.

Amazon has invested more than £1bn on TV, movie and live sport content in the UK in recent years and plans to increase spending to make it a must-have streaming service for cash-strapped households.

EasyJet has said it was heading for summer with “strong momentum and optimism”, flying at near pre-pandemic capacity in peak season as the lifting of Covid restrictions helped the airline narrow its half-year losses and look to a return to profit.

An umbrella created as part of a collaboration between Gucci and Adidas has met with a storm of criticism in China, where social media users have derided the fact it fails to keep its owner dry.

Four businesses have told us how inflation is hurting their operations:

Wall Street has opened a little lower after its worst day in two years, as fears over the economic outlook loom over the markets.

The Dow Jones industrial average is down 214 points, or 0.7%, at 31,275 points, after a 3.6% tumble on Wednesday.

The broader S&P 500 index has dropped by 0.35%, while the tech-focused Nasdaq Composite index is flat.

Georgieva: G7 finance leaders must prepare for multiple inflationary shocks

Bundesbank President Joachim Nagel, Kristalina Georgieva and Federal Minister of Finance Christian Lindner at the summit of the G7 Finance Ministers and Central Bank Governors at the Petersberg Hotel in Königswinter.
Bundesbank President Joachim Nagel, Kristalina Georgieva and Federal Minister of Finance Christian Lindner at the summit of the G7 Finance Ministers and Central Bank Governors at the Petersberg Hotel in Königswinter. Photograph: snapshot/Future Image/R Schmiegelt/REX/Shutterstock

IMF chief Kristalina Georgieva has warned that finance leaders need to brace for multiple inflationary shocks, and that bringing down inflation without causing recessions is getting harder.

Reuters has the story:

International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that global finance leaders may need to become more comfortable with fighting multiple bouts of inflationary pressures.

Georgieva told Reuters on the sidelines of a G7 finance ministers and central bank governors meeting in Germany that it is getting harder for central banks to bring down inflation without causing recessions, due to mounting pressures on energy and food prices from Russia’s war in Ukraine, China’s zero-COVID policies that have slashed manufacturing with lockdowns, and the need to reorder supply chains to make them more resilient.

“I think what we need to start getting more comfortable with is, that may not be the last shock,” she said, noting that she stopped viewing inflation as a “transitory” one time shock when the Omicron COVID-19 outbreak took hold late last year.

Factory growth in the Philadelphia region has slowed to a two-year low, according to a closely-watched survey that will reinforce concerns that the US economy is slowing.

The Federal Reserve Bank of Philadelphia’s manufacturing survey showed that growth almost stalled this month.

Most firms (57%) reported no change in current activity this month, while the share of firms reporting increases (22%) only narrowly beat the share reporting decreases (20%). That shows the slowest growth since early in the pandemic in 2020.

The indicators for new orders and shipments rose, but the employment index decreased, and the price indexes remained elevated with 81% of firms reporting their costs had risen.

Optimism for growth over the next six months was muted.

US jobless claims rise to 218,000

More Americans filed new claims for jobless support last week, adding to signs that the US economy could be slowing.

There were 218,000 new ‘initial claims’ for unemployment insurance last week, a 21,000 increase on the previous week, and more than expected.

That indicates that more firms may have laid off staff, as rising inflation pressures hit businesses.

The initial claims total has been moving higher in recent weeks, after hitting the lowest since 1969 in March.

The previous week’s total has been revised down, from 203,000 to 197,000.

Department store chain Kohl’s Corp has joined the ranks of US retailers warning that inflation is eating into profit margins and consumer spending.

Kohl’s has massively missed earnings forecasts for the last quarter, and also slashed its profit and sales outlook for the year.

It made just 11 cents, versus forecasts of 70 cents per share, on an adjusted basis.

Net sales fell 5.2%, missing forecasts of a 0.5% increase, and suggesting that US consumers have been cutting back on

Kohl’s chief executive officer Michelle Gass said the retail sector has become more challenging:

“Sales considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment.”

Shares are down almost 7% in pre-market trading.

Amazon has invested more than £1bn on TV, movie and live sport content in the UK in recent years and plans to increase spending to make it a must-have streaming service for cash-strapped households.

It is the first time that Amazon has revealed the level of investment in Prime Video in the UK, spanning the period since 2018, as competition for viewers intensifies amid a mounting cost of living crisis.

While Amazon’s annual UK budget lags that of the $1bn (£810m) spent by Netflix on hits from Bridgerton to Sex Education, it continues to rapidly grow – with big releases in the pipeline such as the Lord of the Rings series – while its rival is in the process of cutting budgets and staff after reporting its first fall in subscribers in a decade.

Sri Lanka falls into default for first time ever

Protestors take part in an ongoing anti-government demonstration in Colombo on May 18, 2022, demanding President Gotabaya Rajapaksas resignation over the country’s crippling economic crisis.
Protestors take part in an ongoing anti-government demonstration in Colombo on May 18, 2022, demanding President Gotabaya Rajapaksas resignation over the country’s crippling economic crisis. Photograph: Ishara S Kodikara/AFP/Getty Images

Sri Lanka has fallen into default for the first time in its history, as its economic crisis deepens and inflation surges higher.

Sri Lanka’s central bank confirmed today it had missed a deadline for $78m of foreign debt repayments on two sovereign bonds, as a 30-day grace period expired.

Spiralling food and fuel costs, shortages and rolling power blackouts have led to nationwide protests and a plunging currency, with Sri Lanka short of the foreign currency reserves it needed to pay for imports.

Last month, the government said it would halt payments on its foreign debt to preserve cash for essential goods, and seek a debt restucture.

This is Sri Lanka’s first sovereign debt default since it gained independence from Britain in 1948. According to Moody’s, it is the first sovereign default in the Asia-Pacific region this century.

On Monday, Sri Lanka’s new prime minister, Ranil Wickremesinghe, has warned that the financial crisis engulfing the country will get worse and “the next couple of months will be the most difficult ones of our lives”.

In his first address to the country on Monday, Wickremesinghe described the conditions of the country’s finances as “extremely precarious”.

“In November 2019, our foreign exchange reserves were at $7.5bn. However, today, it is a challenge for the Treasury to find $1m.”

Central bank governor Nandalal Weerasinghe predicted today that inflation could accelerate to 40% in coming months.

Many other low- and middle-income countries are struggling with a three-pronged crisis: the pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion of neighbouring Ukraine.

Our economics editor Larry Elliott explained earlier this month that Sri Lanka is unlikely to be the last to buckle.

Squeezed company profits, the Ukraine war, and supply chain disruption in China are all adding to the panic in the markets, says Raffi Boyadjian of XM:

Sellers returned to Wall Street on Wednesday as a big drop in profits by America’s retail behemoths raised the spectre of diminishing margins, in what could only be the start of high inflation eating into corporate earnings.

Target was the second US retailer to report a large miss in earnings per share this week, a day after Walmart did the same. Its stock slumped by almost 25% yesterday, pulling the S&P 500 down by 4% - the biggest daily decline since June 2020. The Nasdaq Composite slid 4.7%, while the Dow Jones ended the session 3.6% lower.

With several other retailers yet to report their results, including Kohl’s today, there could be further negative surprises on the way for Wall Street.

However, whilst it’s certainly true that many investors are only now coming to terms with the reality that profits will take a substantial hit from soaring input costs, the reason why the sense of panic has become more heightened lately is the fear that supply disruptions and the associated shortages are here to stay.

The war in Ukraine has been dragging on for three months now and doesn’t look like it will end anytime soon, meaning the tough sanctions against Russia will stay in place for the foreseeable future. In addition, the latest lockdowns in China couldn’t have come at a worst time as they’ve exacerbated already strained supply chains.

Growth worries hit markets

Back in the City, the FTSE 100 index has now tumbled 2.5% today, as a global stocks rout deepened.

The blue-chip index is currently down 183 points or 2.5% at 7254 points, on track for its worst day since early March, when the Ukraine war spooked markets.

Bloomberg explains that bets that robust earnings can help investors weather this year’s turbulence were thrown in doubt after US consumer titans Target and Walmart signaled that high inflation was hitting profit margins and consumer spending.

“We are pricing in a growth scare,” Lori Calvasina, the head of US equity strategy at RBC Capital Markets, told Bloomberg TV.

“There is a lot of uncertainty in this market right now about whether or not that recession is going to come through or if it’s going to be another near-death experience.”

Close Brothers Asset Management’s chief investment officer Robert Alster said growth concerns were rising:

“Target and Walmart coming out with disappointing numbers has really, really spooked people,”

“We are going to see a raft of downgrades to U.S. GDP (forecasts) now... it really looks like we are running into a faster slowdown than we expected.”

(via Reuters)

UK manufacturing confidence slides despite pickup in output growth

Confidence among UK manufacturers has fallen, despite new orders growth running at record levels.

The CBI’s latest Industrial Trends survey shows that confidence declined in the last quarter, with investment plans for buildings and plant and machinery dropping.

Encouragingly, UK manufacturing output grew at its fastest pace in ten months over the three months to May, with new order growth matching the record high seen in March.

But the number of firms planning to lift prices rose too, close to March’s record high. That will add to the cost of living squeeze, as companies pass on rising costs to consumers.

Anna Leach, CBI deputy chief economist, said:

Manufacturers have reported output growth and order books improving in May. But cost pressures remain acute and are pushing manufacturers to raise prices. Sentiment among manufacturers has fallen in recent months as the outlook has deteriorated following Russia’s invasion of Ukraine, and investment plans are being scaled back.

Rising costs are hitting consumers and businesses alike, and the Government can and must take action now to support the economy through the challenging months ahead. Putting pounds in the pockets of people already struggling should not be delayed, and must be coupled with action to support firms’ cashflow and to stimulate investment.”

Wall Street is set to add to its losses, after its worst session in almost two years.

The Dow Jones industrial average down around 1.4% in pre-market trading, after diving by 3.5% on Wednesday.

Today’s selloff means the FTSE 100 index is now down almost 2% so far this year.

The FTSE 100 this year
The FTSE 100 this year Photograph: Refinitiv

That’s a smaller decline than other markets, with London’s blue-chip index supported by oil companies, miners, and utility companies.

In contrast, the pan-European Stoxx 600 index is down around 13% this year, while America’s S&P 500 has tumbled 18%, dragged down by sharp falls in major tech stocks.

The rising cost of materials and energy are the top concerns for UK companies, as inflation hits its highest in 40 years.

Around 26% of businesses said input price inflation was their main concern this month, up from 24% in April 2022, followed by 20% who cited soaring energy prices.

The latest Business Insights report from the Office for National Statistics found that 22% of companies had experienced global supply chain disruption in April (up from 20% in March).

The proportion of businesses reporting a shortage of workers dipped slightly to 13%, but this rose to 34% of firms in the accommodation and food service activities sector.

Total online job adverts decreased by 3% in the week to 13 May 2022.

The ONS also reported a drop in consumer spending last week, with UK credit and debit card purchases decreasing by 6 percentage points, and restaurant reservatations down 10 percentage points -- although there was a bank holiday the previous week.

FTSE 100 down 2%

The blue-chip FTSE 100 is now down 2.2%, with every share in the red.

Royal Mail is still leading the selloff, now down 0ver 10%, after missing profit forecasts and warning about rising inflation and slowing growth.

Investment group 3i (-8.3%), distribution group Bunzl (-5.6%) and technology investor Scottish Mortgage (-5%) are following.

Retailers Kingfisher (-4.8%) and Tesco (-4.8%), and consumer goods maker Unilever (-4.7%) are also being pummelled by concerns that consumers will cut spending as their incomes are squeezed by inflation.

AJ Bell investment director Russ Mould says the warnings of rising costs from US retailers Target and Walmart this week have hit market confidence.

“After the Walmart wobble on Tuesday, Target struck terror into the hearts of the US retail sector and was a big contributing factor behind the worst day for US markets since 2020 on Wednesday.

“The extent of the impact of inflation on these giants of American retailing has woken investors up, once again, to the huge impact surging prices are having on every facet of the economy.

“Combine this with hints from the US Federal Reserve about more aggressive interest rate hikes and it’s little wonder that stagflation fears – a slowing economy combined with inflation running hot – are stalking the markets once more.

Updated

European selloff gathers pace

European stock markets are all sharply lower, as investors grow increasingly nervous that economies are set to fall into recession.

The FTSE 100 index is now down 148 points, or 2%, with 96 of its one hundred members falling this morning.

The FTSE 100, May 19 2022
The FTSE 100 this morning Photograph: Refinitiv

Consumer goods and services firms, energy companies, banks and industrial stocks are the worst-performing sectors.

Germany’s DAX has shed 2%, with France’s CAC 1.9% lower, as European markets slide following Wall Street’s worst day since 2020.

Europen food and beverage company stocks have dropped 2.5% to a two-month low, on concerns that cash-strapped consumers will be forced to cut back in the face of soaring inflation, and rising interest raters.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says those disappointing results from US retailers have spooked markets.

The slide was sparked by the US retail giant Target warning that customers were already buying fewer high ticket items like furniture and electronics, with higher fuel prices and supply chain costs also eating into margins. It comes hot on the heels of Walmart’s.

With consumer spending power expected to be eroded further through interest rate rises, the worry is that Target’s pain is a precursor for yet more struggles to come for retailers. A trend also seems to be emerging of people wanting to save their dollars to spend on experiences like holidays rather than homewares with luggage at Target selling fast.

Consumers are showing more caution but after the pandemic lockdowns there is clearly pent up demand for travel with airlines like easyJet ramping up capacity to meet demand and bookings at restaurants surging. So while goods price inflation may fall, it may be hard to keep a lid on the price of services, particularly with higher wage costs amid the fight for labour also being passed onto customers.

Updated

Unions are urging Royal Mail to provide a ‘no strings attached’ pay rise.

The postal group says it has made a pay offer worth 5.5%, which would be its biggest pay offer for many years.

But it also wants to make changes to its delivery model and working practices, so it can “compete and adapt more quickly to changing customer needs”

Royal Mail says:

CWU has rejected our offer, and has informed Royal Mail it is making preparations for a possible ballot for industrial action. We believe this is premature and have entered into our formal Dispute Resolution Procedures to try to secure agreement.

This process was put in place to help deal with this kind of situation. We are going into it in good faith to try and reach an agreement and give our people a pay increase as soon as possible.

The Communications Workers Union insists, though, that Royal Mail can afford a pay rise without conditions attached.

Shares in Royal Mail are down 7% this morning, the top FTSE 100 faller.

Royal Mail to slash costs and lift prices

Royal Mail is planning to slash costs and lift prices after being hit by rising inflation, as the postal operator misses City forecasts.

Royal Mail reported that pre-tax profits fell 8.8% in the last year to £662m in the year to 27 March, as its parcels business normalised as pandemic restrictions were eased, and the boom in online shopping slowed. Adjusted profits rose 8%, though, to £758m.

Revenues fell 1.6% year on year, with domestic parcel volumes dropping 7% despite growth in deliveries of Covid-19 test kits.

Non-executive chair Keith Williams says Royal Mail now faces ‘clear headwinds’, such as weakening GDP and growing inflationary pressures, which it plans to address through price increases and growth initiatives.

Royal Mail has already already increased domestic prices of our letter services by an average of 7%, and parcel prices by an average of 4%, in addition to the fuel surcharge.

The company says:

Inflation rose throughout the second half of the year.

Wage inflation in tight labour markets, sharp increases in energy and fuel costs, exacerbated by the war in Ukraine, and a cost of living squeeze in many countries are resulting in an uncertain outlook for GDP and consumer spending, creating significant headwinds as we enter 2022-23.

Royal Mail says it has identified cost savings in excess of £350m to mitigate macro-economic pressures.

In the City, the FTSE 100 index has dropped by 1% in early trading, down 74 points at 7363.

Retailers such as Kingfisher (-4.9%), Tesco (-4.8%) and Next (-2.2%) are among the fallers.

EasyJet narrows losses

Easyjet aircraft at Manchester Airport
Easyjet aircraft at Manchester Airport Photograph: Oli Scarff/AFP/Getty Images

Budget airline easyJet says it “faces summer 2022 with optimism”, after narrowing its losses due to strong bookings despite the cost of living squeeze.

Easyjet told shareholders that bookings in the last 10 weeks have been consistently above the same period in 2019, as demand after travel restrictions were lifted.

It reports:

  • · Forward bookings for the third quarter are 76% sold and 36% sold for the fourth quarter.
  • · In the last 10 weeks, bookings have been 6% above the same period in 2019
  • · Easter holidays saw load factors of 90%

The disruption caused by Omicron pushed easyJet into a pre-tax loss of £545m in the six months to the end of March, compared with a £701m loss a year earlier.

EasyJet was hit by staff sickness this year, leading to a wave of flight cancellations in the Easter period.

And despite the pick-up in bookings, easyJet says it still faces short-term uncertainty, so won’t provide any further financial guidance for the 2022 financial year.

Customers are booking closer to departure and visibility remains limited.

Johan Lundgren, easyJet chief executive said the airline had ‘transformed’ during the pandemic:

“easyJet has reduced its losses year on year, at the better end of guidance. The pent-up demand and removal of travel restrictions provided for a strong and sustained recovery in trading which has been further boosted as result of our actions.

These include the radical reallocation of aircraft which has seen more than 1.5m seats moved to the best performing markets and the step-change in our ancillary products delivering increased revenue - both of which have contributed to our total yield increasing by 9% compared to the same period in FY19. All of this is not only delivering now but with more to come in the future as even more passengers take to the skies.

Shares have opened almost 1% higher.

Updated

US wheat prices have continued to rise today, which will add to inflationary pressures in the food sector.

The move comes after India unexpectedly banned wheat exports last week, and the Russia-Ukraine war kept underpinning global grains markets - raising concerns of a global food crisis.

Reuters has the details:

The most-active wheat contract on the Chicago Board of Trade (CBOT) was up 0.89% at $12.41-3/4 a bushel.

CBOT wheat had climbed more than 8% over the past two days, following India’s wheat ban and reports showing bad condition of U.S. winter crop.

CBOT soybeans edged up 0.95% to $16.78-1/2 bushel, extending gains, while corn rose 0.48% to $7.85-1/4 a bushel.

Ukraine invasion could cause global food crisis, UN warns

The United Nations has warned that the war in Ukraine has helped to stoke a global food crisis that could last years if it goes unchecked, as the World Bank announced an additional $12bn in funding to mitigate its “devastating effects”.

UN secretary general António Guterres said shortages of grain and fertiliser caused by the war, warming temperatures and pandemic-driven supply problems threaten to “tip tens of millions of people over the edge into food insecurity”, as financial markets saw share prices fall heavily again on fears of inflation and a worldwide recession.

Speaking at a UN meeting in New York on global food security, he said what could follow would be “malnutrition, mass hunger and famine, in a crisis that could last for years”, as he and others urged Russia to release Ukrainian grain exports.

He said he was in “intense contact” with Russia and other countries to try to find a solution.

“The complex security, economic and financial implications require goodwill on all sides for a package deal to be reached,” he said of his discussions with Moscow, Ukraine, Turkey, the US, the European Union and others.

“I will not go into details because public statements could undermine the chances of success.”

The foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea.
The foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea. Photograph: Ahn Young-joon/AP

Asia-Pacific markets have dropped, following last night’s heavy losses on Wall Street.

Hong Kong’s Hang Seng is leading the selloff, down 2.4% in afternooon trading, with South Koria’s KOSPI losing 1.5% and Japan’s Nikkei off 1.9%.

Technology stocks slid, with Tencent Holdings losing 6.6% after reporting its slowest revenue growth on record following China’s crackdown on technology companies.

Stephen Innes of SPI Asset Management says Target’s weak quarterly earnings added fuel to the recession risk narrative, on top of fears over rising interest rates:

Equities continue to be at the mercy of broader macro themes, with more hawkish comments from Fed Chair Jay Powell leading to a further move higher in front-end rates, which continues to prove problematic for risk.

Medium-term, the Fed is likely to respond to any easing in financial conditions by ratcheting up the hawkish noises and, in effect, acting as a lid on the markets. And this should keep active money on the sidelines.

The wild ride on the US stock markets continued on Wednesday with the Dow Jones Industrial Average sinking more than 1,100 points as investors worried about a looming recession.

All of the major US markets fell sharply, with the S&P closing down 4%, its largest fall since June 2020, and the tech-heavy Nasdaq losing 4.7%.

On Tuesday markets had rallied following positive news about consumer spending and signs that China was relaxing its strict Covid-19 lockdowns. Just a day later concerns about an economic slowdown triggered a wide-ranging sell-off.

The sell-off began after Target said supply chain costs and inflationary pressures had cut into its profits and customers were buying fewer higher-margin items such as kitchen appliances, televisions and furniture. More here:

Introduction: US stocks worst day since 2020 amid recession worries

Trading updates on monitors on the trading floor at the New York Stock Exchange yesterday
Trading updates on monitors on the trading floor at the New York Stock Exchange yesterday Photograph: Andrew Kelly/Reuters

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Recession fears are swirling through the markets again, as rising inflation and snarled supply chains hit economies, driving up the cost of living and hitting some company profits.

Last night, US stocks posted the biggest daily drop in almost two years, on concerns that economic growth will falter as central bankers look to raise interest rates to stem the surge in inflation.

Fed chair Jerome Powell’s determination to keep lifting borrowing costs until inflation falls meaningfully has rattled Wall Street, and is likely to push European markets lower today too.

The S&P500 fell more than 4% lower yesterday, Nasdaq slumped more than 5% and the Dow slid more than 3.5%.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

Powell said this week that the Federal Reserve would go beyond what could be a neutral rate to tame inflation.

But at this point, no one knows where the neutral rate is, even the central bankers don’t have a clue.

The main catalyzers behind the move are always the same: the worry of high inflation, tighter Fed to fight the sky-high inflation, and the fear of recession.

Tech stocks, which had benefitted from ultra-loose monetary policy in 2020 and 2021, were hammered again - sending the Nasdaq Composite down nearly 28% so far this year. Apple lost 5%, while Amazon shed 7%.

The benchmark S&P 500 share index saw its biggest loss since June 2020 too, with traders spooked by retailer Target. Its stock plunged 27% after it cut its profit forecast and warned costs were mounting.

Walmart had made a similar warning on Tuesday, as it grappled with surging inflation on food and fuel.

Data showing a drop in US housing starts, and building permits, added to concerns that the US economy could be slowing.

Jim Reid of Deutsche Bank explains:

There wasn’t a single catalyst behind the slump, but weak housing data out of the US along with Target’s move to cut its profit outlook helped feed investor concern that the consumer might not be in as strong a position as previously thought.

And that’s on top of all the other worries of late that the global economy is heading in a stagflationary direction amidst various supply-chain issues, alongside the prospect that tighter central bank policy is going to further dent growth and risks tipping various economies into recession.

That could include the UK, which looks vulnerable to a downturn after inflation hit a 40-year high of 9% yesterday.

The agenda

  • 9.30am BST: Latest UK economic and business activity report from the ONS
  • 11am BST: CBI industrial trends report
  • 12.30pm BST: ECB Monetary Policy Meeting Accounts
  • 1.30pm BST: US weekly jobless figures
  • 3pm BST: US home sales

Updated

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