Treasury yields rose and Wall Street stocks fell on Friday after data on U.S. producer prices raised conflicting views, stirring hope of moderating inflation but also fears the Federal Reserve will need to keep interest rates higher for longer.
The producer price index (PPI) for final demand rose 0.3% last month and increased 7.4% in the 12 months through November, while the PPI for October was revised up to 0.3% from 0.2% as previously reported, the U.S. Labor Department said.
Economists polled by Reuters had forecast monthly PPI climbing 0.2% and rising 7.2% year-on-year.
While the data showed inflation slowing over the last 12 months, the monthly rise fueled concerns that next week's report on the consumer price index may indicate inflation is sticky and lead the Fed to not cut rates as soon as many anticipate.
Fed policymakers are expected to raise rates by 50 basis points next Wednesday at their last meeting of the year, to a range of 4.25% to 4.50%, which would mark a slower pace of rate increases.
"The markets are overly optimistic that at some point between June and December (next year) the Fed is going to be willing to cut," said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.
"Today's data shows that inflation is coming down, but it's lingering and is stickier than most assume," he said. "The Fed is going to have to raise interest rates a little bit more."
Futures show the terminal rate peaking at 4.948% next May, and then declining to 4.488% by December 2023.
U.S. stocks earlier pared losses after the University of Michigan's preliminary reading on consumer sentiment showed an improvement to 59.1 in December from 56.8 the prior month.
But enthusiasm over the UMich surveys soon waned and stocks on Wall Street closed decisively lower. The Dow Jones Industrial Average fell 0.9%, while the S&P 500 lost 0.73% and the Nasdaq Composite dropped 0.7%.
For the week, the Dow lost 2.78%, the S&P 500 3.38% and the Nasdaq 3.99%.
"The Fed has made it abundantly clear that it's not in the business of repeating mistakes of the past," Johan Grahn, head of ETFs at Allianz Investment Management in Minneapolis, said in a reference to halting rate hikes too soon.
"Time just needs to run its course before we know we're on the right path toward the Fed's goal, a softish landing that's been talked about," Grahn said. "It will take time for inflation to work its way down."
MSCI's U.S. centric gauge of stocks across the globe fell 0.14%, while in Europe the broad STOXX 600 index (.STOXX) rose 0.84%. But recession worries dragged the pan-European index to a weekly loss after a seven-week rally.
Treasury yields rose, suggesting higher rates ahead for the long term, with the benchmarket 10-year yield up 10.2 basis points to 3.595%.
The two-year note , which often moves in step with rate expectations, rose 3.2 basis points to 4.344%.
The yield curve measuring the gap between yields on two- and 10-year notes , a recession harbinger, was at -75.5 basis points.
The Fed's summary of economic projections is likely to show rates will stay higher currently priced into futures, said Cliff Hodge, chief investment officer at Cornerstone Wealth in Charlotte, North Carolina in a note.
"The markets are too sanguine on rates after the first quarter and we expect Powell to take a more hawkish tone," Hodge said, referring to Fed Chairman Jerome Powell.
The dollar was broadly weaker overnight, but reversed some of its losses after the PPI report.
The euro fell 0.27% to $1.0528 and the yen was flat to 136.68 per dollar.
The world's largest investment banks expect global economic growth to slow further in 2023 following a year roiled by the Ukraine conflict and soaring inflation, which triggered one of the fastest monetary policy tightening cycles in recent times.
In addition to the Fed, the European Central Bank and the Bank of England are also set to announce rate hikes next week as policymakers continue to brake the economy to curb inflation.
Oil prices rose but both benchmarks were set for a weekly loss as worries over a weak economic outlook in China, Europe and the United States weighed on oil demand.
U.S. crude futures fell 44 cents to settle at $71.02 a barrel. Brent settled down 5 cents at $76.10.
Gold prices rose despite an uptick in the dollar and Treasury yields as some investors still expect the Fed will slow the pace of rate hikes from early next year.
U.S. gold futures settled 0.5% higher at $1,810.70 an ounce.
Samantha Subin and Carmen Reinicke of CNBC also report Dow tumbles 300 points Friday, posts worst week since September:
Stocks finished lower Friday, with all the major averages posting losses for the week as worries persisted over continued rate hikes.
The Dow Jones Industrial Average shed 305.02 points, or 0.9%, to close at 33,476.46. The S&P 500 tumbled 0.73% to end at 3,934.38, while the Nasdaq Composite fell 0.7% to finish at 11,004.62.
On a weekly basis, the Dow fell 2.77% to post its worst week since September. The S&P tumbled 3.37%, while the Nasdaq dropped 3.99%.
Friday’s moves came after November’s producer price index showed higher-than-expected wholesale prices, which rose 0.3% last month and 7.4% over the previous year. Core PPI, which excludes food and energy, also topped expectations.
Optimistic consumer sentiment data alleviated some fears, but attention remains laser-focused on next week’s busy economic calendar.
Attention shifted toward the consumer price index due out Tuesday, which is expected to show whether inflation has receded. The Federal Reserve will likely deliver a 50 basis point hike at the end of its December meeting on Wednesday. While the increase would be smaller than the previous four hikes, concerns have mounted over whether the central bank can architect a soft landing and prevent a recession.
Investors have long hoped for a pivot from the Fed’s aggressive tightening stance, but the data fails to support that desire, said Stephanie Lang, chief investment officer at Homrich Berg.
“It’s our expectation that we really need to see inflation come down closer to the fed funds rate for the Fed to pause, and we still have quite a bit of delta between those numbers,” she said. “There’s still a bit of work to be done on the inflation front to really see that as the reality.”
In other news, shares of Lululemon tumbled nearly 13% after the company gave a weaker-than-expected fourth-quarter outlook. DocuSign jumped 12% on strong results.
Alright, it's Friday, I'm in a good mood but sort of lazy as I met up with my mom earlier for lunch and we had some wine and delicious pizza.
And there were two amazing soccer matches to watch today (Croatia and Argentina advance after winning in their respective shootouts).
On top of that, my wife made a delicious Fettuccine Alfredo for dinner, so I'm overloaded with carbs and just want to pass out on the couch and watch Shark Tank and a good Christmas movie with her.
But I must deliver a daily blog comment, so here are my market thoughts for the week and I'll try to be brief.
Let me begin with the obvious. Can we all please stop already the nonsense that the Fed or any other central bank in the developed world will magically engineer a soft landing? It's not going to happen.
This is written as if the downturn is over and the Fed can congratulate itself. It's a "point in time" analysis of a cycle that is more like a time-series. Remember, the Fed's last rate hike pre-GFC was in June '06 and the GFC did not come until 08/09.https://t.co/MshkGArMKj
— Francois Trahan (@FrancoisTrahan) December 8, 2022
Saved a screenshot just in case pic.twitter.com/BJLtYLmIte
— Ramp Capital (@RampCapitalLLC) December 9, 2022
As I've stated plenty of times when covering markets this year, those who are not preparing for a very deep and prolonged global recession are going to get their heads handed to them next year.
It's going to be a hard and painful landing, there's no way around this:
RH CEO: 'The housing market is collapsing'https://t.co/FoPz1qMFJN via @YahooFinance
— Leo Kolivakis (@PensionPulse) December 9, 2022
Francois Trahan of Trahan Macro Research keeps reminding us of Ed Leamer's seminal paper, Housing is the Business Cycle.
And housing markets all over the developed world aren't looking good, they're looking scary:
Britain’s housing market is headed for its worst slump since the global financial crisis. These charts tell the story https://t.co/aLrIpHCcSF
— Bloomberg Asia (@BloombergAsia) December 7, 2022
UK only ranked mid table for housing markets most at risk of downturn - Canada and Australia at the tophttps://t.co/nKLBYbV6Ja
— Jules Birch (@jules_birch) December 2, 2022
Now, apart from housing the yield curve has inverted to depths not seen since the 1980s, raising recession fears:
Yield Curve Inverts To Depths Not Seen Since 1980s, Raising Recession Fears https://t.co/PEuiLiXcFs
— Forbes (@Forbes) December 9, 2022
Ask people about the 1981-82 recession, it was terrible.
Right now, nobody sees it, employment remains solid, consumer balance sheets are supposedly still good but dig a little deeper and you'll see problems arising:
One of the pushbacks when I mention "recession" is how healthy consumer balance sheets are. I doubt this, especially with home prices declining. Regardless, "401K hardship withdrawals" are at all-time highs. Surely NOT in the "healthy consumer" column.https://t.co/SpubDZKj6g
— Francois Trahan (@FrancoisTrahan) December 9, 2022
Interesting that FHA mortgage delinquency rates are rising this quickly without widespread job losses. pic.twitter.com/wECPMAemzE
— Rick Palacios Jr. (@RickPalaciosJr) December 9, 2022
Long Covid is distorting the labor market — and that's bad for the U.S. economy https://t.co/4BqJo5BQ47
— CNBC (@CNBC) December 9, 2022
As far as inflation, next week we get the US November CPI report and while oil and gas prices have fallen, and in all likelihood it will come in better than expected, the truth is inflation remains sticky and as Carl Icahn has stated, once it's out of the genie bottle, it's hard to put it back in:
Oil is now negative for the year.
— Santiago Capital (@SantiagoAuFund) December 8, 2022
Think back to the spring and where everyone thought it was headed. Nothing is ever certain... pic.twitter.com/prLyMBebQ0
The Fed model not getting a lot of attention of late is the Atlanta Fed's Sticky CPI series. We believe inflation cools next year, but enough to make the Fed comfortable about pausing rate hikes? We think the answer is "not as quickly as the Fed and consensus expects". pic.twitter.com/fHNPLFBn0E
— Francois Trahan (@FrancoisTrahan) December 8, 2022
The biggest risk next year is the Fed and other central banks will pause but inflation pressures will remain sticky because wage inflation will pick up, potentially forcing the Fed to hike more even as unemployment spikes (stagflation).
We shall see but clearly investors need to revisit their rosy scenarios for equity markets:
Investors expect a recession, BUT 77% also expect average or better equity returns in 2023.
— Francois Trahan (@FrancoisTrahan) December 8, 2022
Equity markets and the economy are strongly correlated. There have been divergences, but they are rare. Consensus is basically saying "it's different this time".https://t.co/qNuPrLs1Hg
Fed Expected to Keep Peak Rates for Longer, Dashing Hopes for 2023 Cuts https://t.co/qP33TU2C4Q via @YahooFinance
— Leo Kolivakis (@PensionPulse) December 9, 2022
Yes, it's true that stocks recover six months (on average) before the recession ends but the real recession has yet to start and we are nowhere near the end:
Wasn’t it Druckenmiller who said the best economist he knows is the guts of the stock market? 👇 Chart @SethCLpic.twitter.com/iuIBW0Auwc
— Michael A. Arouet (@MichaelAArouet) December 9, 2022
Again, with the yield curve inverted the most in 40+ years, maybe CEOs are bang on this time around to be very worried:
With the yield curve inverted the most in 40 years, I’d say CEOs are bang on this time, we are headed towards the most severe and prolonged global recession in decades. Those who are trading and investing believing otherwise will get crushed next year.
— Leo Kolivakis (@PensionPulse) December 8, 2022
And while the put-to call ratio spiked, which is typically a contrarian indicator, the VIX remains relatively tame and sometimes there's a good reason to be really bearish:
CBOE #put/#call ratio back to highs as demand for #bullish call options wanes.@RealInvAdvice@soberlookpic.twitter.com/42kZqkwWzj
— Lance Roberts (@LanceRoberts) December 9, 2022
Bulls, if you can watch the same movie three times and still not remember the ending, that means you are malfunctionally senile. pic.twitter.com/wY8mK71xYy
— Mac10 (@SuburbanDrone) December 9, 2022
We haven't seen this type of madness since 2020.
— Mac10 (@SuburbanDrone) December 9, 2022
Right before the meltdown. pic.twitter.com/xbUzcYLcLY
Having lagged all year, Chinese stocks have been outperforming lately. On the basis that they will lead some sort of global recovery.
— Mac10 (@SuburbanDrone) December 9, 2022
It's clear gamblers don't remember that's how the pandemic crash started. pic.twitter.com/O5sMpWmBLQ
$vix 2022 vs. $vix 2008 update pic.twitter.com/F6sOhEQYKi
— Michael J. Kramer (@MichaelMOTTCM) December 9, 2022
Let me end with my favorite tweet of the week:
Elon Musk: If the FED raises rates again next week, the recession will be greatly amplified
— Genevieve Roch-Decter, CFA (@GRDecter) December 9, 2022
Jerome Powell: pic.twitter.com/wEcWWr8KqU
Actually, this was my favorite on this week:
A beautiful family of deer. pic.twitter.com/3pyCf8BKbz
— Fascinating (@fasc1nate) December 7, 2022
Pure magic!
Also worth noting, there might be structural changes happening right now that will influence the way we will invest over the next decade:
Investing is going back to an old normal, says @MerrynSWhttps://t.co/nzz3UINMPK
— Bloomberg Opinion (@opinion) December 9, 2022
Alright, let me wrap it all up and go watch Shark Tank and a good Christmas movie on Prime (really liked Mingle All the Way) and digest all that food I ate today (feel fatso tubby).
Below, Megan Greene, chief economist at Kroll Global, and Kristen Bitterly, Citi Global Wealth Management's head of North America investments, and CNBC's Steve Liesman join CNBC's 'Squawk Box' to react to November's key producer price index.
Also, Tony Dwyer, Canaccord Genuity chief market strategist, joins 'Closing Bell' to discuss whether he was surprised by Friday's PPI data, how he's positioning for early next year and more.
Third, CNBC’s ‘Halftime Report’ investment committee, Jason Snipe, Rob Sechan, Steve Weiss and Shannon Saccocia, discuss how to position your portfolio in an inflationary environment.
Lastly, Marko Kolanovic, JPMorgan chief global markets strategist, joins the 'Halftime Report' to discuss JPMorgan's market call around a growing recession risk and the possibility markets could retest their lows early next year.
I think we will make news lows early next year but it will be volatile.