Markets Fall on Hot Economy, Chance of 0.5% Rate Hikes

James Bullard, president and chief executive officer of the Federal Reserve Bank of St. Louis, will deliver a speech in London, UK, on ​​Tuesday, October 15, 2019.

Luke MacGregor | Bloomberg | Getty Images

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US equities are plagued by a continued hot economy – and aggressive rhetoric from the Fed.

  • US stocks fell Thursday, weighed down by sharp drops at Microsoft, Disney and Tesla. Asia-Pacific markets followed suit, trading lower on Friday. Australia’s S&P/ASX 200 fell 0.81% after the country’s central bank hinted at more rate hikes.
  • The US producer price index, which measures inflation at the wholesale level, rose 0.7% in January. It was the biggest increase since June and 0.3 percentage point higher than economists had expected.
  • China Renaissance, an investment bank that has advised mergers between major Chinese technology companies, is unable to contact CEO Bao Fan. Chinese financial news outlet Caixin pointed out that Cong Lin, former chairman of the bank’s subsidiary, is under investigation.
  • Tesla is recalling 362,758 vehicles equipped with its experimental driver assistance software. The company warned that the software, known as Full Self-Driving Beta, could cause vehicles to crash.
  • PRO Crypto will make a comeback in 2023, according to Bernstein analyst Gautam Chhugani. Investors may view recent US regulatory action as less stringent than they expected.

Looking at the January data, the US economy is running at full speed. A quick summary: the lowest unemployment rate in 53 years. A rebound in consumer spending despite higher prices. And overnight we found out that the producer price index rose the most in eight months. This almost freakishly strong economy means that inflation – while still falling – remains uncomfortably high and sticky.

For a while, it seemed like the markets could live with that — even embracing it as the new normal, where economic growth can comfortably exist with inflation above 2%. With each higher-than-expected inflation report, markets rose.

Until yesterday. The markets eventually collapsed. The Dow Jones Industrial Average was down 1.26%, the S&P 500 was down 1.38% and the Nasdaq Composite was down 1.78%. “It should come as no surprise to see the market take a breather as hopes for a loose Fed in the coming months fade,” said Mike Loewengart, chief model portfolio construction at Morgan Stanley.

Indeed, it’s not just doves fluttering away from the Federal Reserve. It’s the hawks rushing in. Markets had widely anticipated and priced in rate hikes of 25 basis points for the next two Fed meetings. That prediction was shaken up quite a bit yesterday.

St. Louis federal president James Bullard said on Thursday that he was “in favor of a 50 basis point increase and … argued that we should get to the level of rates as soon as possible that the commission deemed sufficiently restrictive “. Cleveland Fed President Loretta Mester echoed Bullard’s hawks, saying she wants higher rate hikes. Neither Mester nor Bullard are voting on the Federal Open Market Committee this year, but their sentiments could signal that the Fed is becoming increasingly determined to quell inflation.

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