Stocks lose steam as survey points to higher US inflation pressures

Wall Street stocks fell on Friday, reversing earlier gains after a downbeat survey of inflation expectations renewed concerns about the Federal Reserve’s planned interest rate rises.

The University of Michigan’s monthly survey of US consumers showed expectations for price rises over the next 12 months had risen to 5.1 per cent, from 4.7 per cent. The Fed has been aggressively rising interest rates in an effort to bring down inflation, and keeps close tabs on consumer expectations, which can fuel worker wage demands and make it harder to reduce the inflation rate.

The inflation concerns outweighed more positive survey results on overall consumer sentiment, which beat forecasts from economists, and solid earnings reports from several of the country’s largest banks.

The broad S&P 500 index fell 2.3 per cent and the Nasdaq Composite, which is dominated by technology stocks that are more sensitive to interest rate expectations, shed 3.1 per cent.

Friday’s falls pushed the S&P 500 to a decline of 1.6 per cent for the week, despite a sharp rally that surprised many traders on Thursday. The blue-chip index initially dropped more than 2 per cent in response to worse than expected inflation data, before reversing course to close up 2.6 per cent.

Several investors said Thursday’s moves were exacerbated by technical factors, and did not reflect a substantial change in the economic outlook.

Greg Boutle, US head of equity and derivative strategy at BNP Paribas, said: “We were in an oversold market and that drove a capitulation of some of the more bearish positioning [but] we wouldn’t read too much fundamentally into that.”

Michael Hartnett, chief investment strategist at Bank of America, wrote that stocks were “simply so oversold” after weeks of declines, but predicted the “ultimate lows ain’t seen yet”.

Markets are now pricing in expectations of a fourth consecutive 0.75 percentage point interest rate rise from the Fed in November.

Investors were also responding to a fresh batch of US banks’ financial statements on Friday, with JPMorgan and peers kicking off the new earnings season in earnest. Corporate reports will be scrutinised in the coming days for signs of strain from high prices and rising borrowing costs.

JPMorgan’s shares rose 1.7 per cent after the bank reported a less severe drop in third-quarter income than analysts had expected. Shares in Citigroup and Wells Fargo also picked up on the back of their third-quarter results, but Morgan Stanley dropped 4.8 per cent as it suffered from a drop-off in investment banking fees.

Friday’s market moves also came after UK prime minister Liz Truss sacked chancellor Kwasi Kwarteng and walked back a planned cut in corporation tax. The government’s “mini” Budget, delivered on September 23, had sparked a dramatic sell-off in UK bonds as investors took fright at the prospect of further borrowing. The volatility in the UK has cascaded into other, bigger markets, such as that for US Treasuries.

Gilts came under renewed selling pressure late on Friday, reversing a rally earlier in the session. The 30-year yield added 0.27 percentage points to 4.80 per cent as the price fell.

The pound slid 1.3 per cent against the dollar to $1.118, having rallied as high as $1.1365 overnight. The dollar added 0.8 per cent against a basket of six peers, and Japan’s yen touched a new 32-year low against the dollar at ¥148.86.

Additional reporting by Kate Duguid in New York