Wall Street plunges after US inflation hits 40-year high

The New York Stock Exchange plunged after the opening on Friday, digesting very badly the publication of an indicator showing inflation at its highest for 40 years in the United States.

Around 2:30 p.m. GMT, the Dow Jones lost 2.44%, the Nasdaq 3.13% while the S&P 500 lost 2.68%.

The three major New York indices have recorded weekly declines in nine of the past ten weeks.

The consumer price index (CPI) in the United States rose by 1% over one month in May, after 0.3% in April. And over twelve months, inflation gallops to 8.6%, against 8.3% the previous month.

This is the highest level of price increases since 1981.

“US stocks are trading lower in early trading as markets worry that the Fed (US central bank) will be even more aggressive” in tightening its monetary policy, commented analysts at Schwab.

The Central Bank’s Monetary Committee is meeting next week and markets are already expecting a 50 basis point tightening of key interest rates, after a similar hike last month.

“High inflation, a Fed that will raise rates more and an increased risk of a slowdown in the economy, that’s what’s happening,” summarized Karl Haeling of LBBW.

According to the analyst, the market now expects the U.S. central bank to “raise rates by 50 basis points at each of its next three meetings and that overnight rates will end the cycle at 3.5% by the middle of 2023”.

The Fed’s key rate is currently between 0.75% and 1%.

Buoyed by the prospect of rate hikes, the dollar surged against the pound, euro and other major currencies. The Dollar index which compares the greenback to a basket of other currencies gained almost 1%.

Bond yields were soaring, with the yield on short-term and long-term US government bonds standing neck and neck.

Rates on 2-year Treasury bills jumped to their highest level since the end of 2018, at 2.95%. Similarly, yields on 10-year notes were approaching their 2018 peak reached in early May at 3.10%.

Added to this bad news for the equity market was a loss of confidence among American consumers. The University of Michigan consumer sentiment index hit its lowest level ever in June.

The index thus lost 14% compared to May, settling at 50.2 points, a decline that surprised analysts, who expected a slight rise, to 59 points.

“Soaring energy and food prices, coupled with falling stock prices, are a toxic combination for consumer sentiment, and Michigan’s index is now at an all-time low,” it said. Ian Shepherdson of Pantheon Macroeconomics.

All sectors of the S&P fell, with banks and information technology plunging more than 3%.

Netflix slipped 4.77% to 183 dollars after an unfavorable opinion from Goldman Sachs analysts who also degraded the Roblox gaming platform (-7.28%) as well as Ebay (-4%).

The stampede affected all the big names in tech, from Alphabet (-3%), the parent company of Google, to Amazon (-4.86%) and Meta, the parent company of Facebook (-3.16%) .

Travel sites and cruise lines were down on the heels of rising fuel prices, with Booking down 6.65%, Expedia down 5.43% and Royal Caribbean Cruise down almost 5%.

Most major US airlines, from United to Delta, were losing around 2%.

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Wall Street plunges after US inflation hits 40-year high