U.S. stocks clawed back from an early rout Thursday after a spate of worrisome inflation data fueled speculation that the Federal Reserve could aim even higher on the next interest rate hike and following disappointing financial results from some of the nation’s biggest banks.
The Dow Jones industrial average had fallen more than 140 points at the closing bell, a decline of 0.5%, after recovering from steep losses that dragged it down more than 500 points earlier Thursday.
The broader S&P 500 index lost 0.3% and the tech-heavy Nasdaq barely slid into green territory.
Stocks have been hammered throughout 2022, with the Dow off by more than 15% for the year.
Disappointing bank earnings contributed to the Thursday morning sell-off.
JPMorgan Chase shares fell 3.4% after the big bank posted a 28% drop in second-quarter profit, citing the need to set aside more money for bad loans.
Morgan Stanley, meanwhile, missed revenue and profit forecasts.
JPMorgan chief executive Jamie Dimon said that although the labor market and consumer spending remain strong, trouble is on the horizon.
A volatile mix of factors, including geopolitical tensions, high inflation, waning consumer confidence and uncertainty around the Fed’s “never-before-seen” rate-raising campaign are “very likely to have negative consequences for the global economy further down the road,” he said.
Investors have been closely watching economic trends for any sign that inflation could be slowing. But fresh Labor Department data for June showed otherwise.
The unexpectedly high 9.1% reading for the consumer price index released Wednesday dimmed the likelihood the Fed will be able to bring prices down without triggering a recession.
An index of prices charged by U.S. factories, known as the Producer Price Index, added to those concerns Thursday by showing that the prices of goods jumped 2.4% in June.
Spiking factory costs in June were linked to energy prices, specifically those of natural gas and diesel. The U.S. average for a gallon of diesel stood at $5.59 on Thursday, according to AAA. That’s 71% higher than last year.
Diesel underlies much of the industrial transportation system, and its higher cost has made it more expensive to ship raw materials from overseas, operate heavy machinery, and transport finished goods to market.
Inflation has been squeezing Americans across the board, forcing them to pay more for essentials like gas, housing and food.
While fuel prices have retreated from their June highs, when the U.S. average passed $5 a gallon, they remain elevated.
The national average was $4.60 on Thursday, roughly 46% higher than it was a year ago.
“The pipeline is filled with inflation that will eventually move up to the consumer level,” wrote Chris Rupkey, the chief economist at FWDBonds. “The Fed needs to fight the inflation war on two fronts, at the producer level and consumer level.”
The recent and upcoming rate hikes are part of the Federal Reserve’s plan to get decades-high inflation under control.
A higher interest rate makes it more expensive to borrow money, pumping the brakes on business investment across the board and softening demand in debt-driven industries like autos and real estate.
Increasing rates should theoretically bring prices down over time, but the deliberate slowing of economic growth also raises the risk of a recession.
Central bank policymakers have raised interest rates three times this year, including by 0.75% in June. The Fed had been widely expected to raise its key rate by another 0.75 of a percentage point later this month.
This week, Canada became the first Group of Seven nation to raise rates by 100 basis points, fueling speculation that the United States could follow suit.
If it does, it would be the largest one-time increase since the Fed began announcing rate hikes in the early 1990s.
Christopher Waller, a Fed governor, said Thursday that while he still supports a 0.75 of a percentage point increase at the Fed’s meeting in two weeks, he is also open to larger hikes depending on the results of upcoming retail sales and housing data.
“If that data comes in materially stronger than expected, it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” Waller said during his remarks in Idaho.
Wall Street may already be pricing in expectations for a larger increase, Citigroup economists wrote Thursday in a note to clients, adding that they expect the Fed to deliver a 100 basis-point rate hike at its meeting later this month.
Other analysts don’t believe the central bank would pursue such an increase given the risk of a recession.
“We remain skeptical that the Fed can pull off simultaneously normalizing its balance sheet, controlling inflation and avoiding severe market disruptions,” said Richard Saperstein, chief investment officer at Treasury Partners, who expects further “downside volatility” in the market.
Investors also are watching for any sign that the job market could be softening.
The federal jobs report released last Friday showed the labor market remained strong in June, with the U.S. unemployment rate holding at 3.6% for the fourth month in a row.
But weekly jobless claims – a proxy for layoffs – climbed by 9,000 last week to 244,000, according to Labor Department data released Thursday.
Comerica Bank chief economist Bill Adams said the rise in jobless claims signals a softening labor market, making the risk of a recession “essentially a coin toss.”
“The economy is close to stalling out,” Adams wrote in a note to investors. “One more negative shock would be enough to push it into a recession.”
Disappointing results from several major banks further soured the mood in early trading.
JPMorgan announced Thursday that it will temporarily halt share repurchases, a cautious approach toward the economy while keeping cash on hand.
Morgan Stanley said that its profit plunged 29% from 2021 to $2.5 billion.
Under volatile economic conditions, the bank reported weaker investment banking activities, which totaled $1.07 billion of second-quarter revenue, less than half of last year’s $2.3 billion and $400 million below analysts’ estimate.
The nation’s four biggest banks – JPMorgan Chase, Citigroup, Wells Fargo and Bank of America – could record a $3.5 billion loss, Gerald Cassidy, the managing director of RBC Capital Markets, told Reuters.’
Citigroup and Wells Fargo will report quarterly financial results Friday, while Goldman Sachs and Bank of America will report next week.
Global markets were relatively tame Thursday despite significant political upheaval, with leaders in Italy and Sri Lanka separately tendering their resignations. Hong Kong’s Hang Seng Index fell just 0.2%, while the pan-European Stoxx 600 dropped by 1.5%.
The euro became less valuable than the dollar for the first time since 2002, a mark of how global many investors have embraced the greenback for its relative stability.
The European Union’s central bank is also raising interest rates but it is doing so at a slower pace.
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