US stocks fell on Friday, with the S&P 500 posting its biggest one-day loss since March, as traders anticipated central banks on both sides of the Atlantic would raise interest rates to curb inflation.
The 2.8% decline in the benchmark S&P 500 came a day after Federal Reserve Chairman Jay Powell said an interest rate hike of 0.5 percentage points was “on the table” in an effort to combat soaring inflation. The weekly decline was also 2.8%.
The tech-heavy Nasdaq Composite lost 2.6%, for a weekly decline of 3.8%, as investors retreated from growth stocks as inflation expectations rose.
The US 10-year breakeven – a closely watched indicator of market inflation expectations over the next decade – climbed to 3.08% on Friday, its highest level in at least two decades.
Meanwhile, the Cboe’s Vix volatility index, which measures expected swings in the S&P 500 and is known as Wall Street’s “fear gauge,” hit a one-month high of 28.3.
After a large sell-off in the US Treasury market on Thursday, the two-year US Treasury yield, which tracks interest rate expectations, was flat at 2.68%. The yield on the note this week repeatedly hit new three-year highs.
The yield on the 10-year Treasury note – which underpins borrowing costs around the world – held steady at 2.9%, also close to its highest level since late 2018.
The Fed’s hawkish rhetoric “has spooked the markets a bit,” said Mona Mahajan, senior investment strategist at Edward Jones. “When we start to see rate hikes, real yields also move into positive territory.”
Powell sent his strongest signal yet on Thursday that the Fed would rapidly raise borrowing costs to combat the biggest U.S. consumer price hikes in 40 years. “It is appropriate, in my opinion, to go a little faster,” he told an IMF panel.
Europe’s Stoxx 600 stock index closed 1.8% lower as the specter of higher borrowing costs in the euro zone weighed on the outlook for corporate earnings, carrying the gauge’s loss for the year to date to more than 7%.
Meanwhile, Luis de Guindos, vice president of the European Central Bank, told Bloomberg that according to the data, the first eurozone rate hike in more than a decade was “possible” from July.
The yield on the German two-year bond, which tracks euro zone interest rate expectations, rose 0.9 percentage points to 0.27%, its highest level since September 2013. The 10-year Bund yield climbed 0.02 percentage points to 0.97%, continuing a significant ascent from near zero in early March. Bond yields rise as their prices fall.
Markets are now pricing in a federal funds rate – the US central bank’s main interest rate – of 2.8% by the end of the year, up from 0.25% to 0.5% currently.
In currencies, the pound fell 1.5% against the dollar to $1.283 – its weakest level since the end of 2020 – after official data showed UK retail sales fell rapidly in March, as high inflation exacerbated the cost of living crisis. The fall also came after the Financial Times reported that the UK government was preparing legislation that would allow it to tear up the Northern Ireland Protocol, jeopardizing the post-Brexit trade deal with the EU.
“It’s a perfect storm for the pound,” said Nicola Morgan-Brownsell, multi-asset fund manager at Legal & General Investment Management. “A large quantity [of the fall] It’s those weak retail sales figures, but Brexit risk has also returned to the headlines.
The dollar index – which tracks the greenback against a basket of global currencies – rose 0.6%.
In Asia, China’s CSI 300 stock index gained 0.4% after the country’s securities regulator urged domestic banks and insurers to support the stock market. Japan’s Topix fell 1.2%.