US and European stocks slide for a fourth consecutive day on Wednesday, ending the month on a low after aggressive messaging from the Federal Reserve brought an abrupt end to the early summer rally.
The broad S&P 500 index fell 0.8 per cent, and has now dropped almost 6 per cent since Fed chair Jay Powell’s hawkish speech at the Jackson Hole Economic Symposium last Friday.
Stock markets had rebounded strongly in July and extended their gains in the first half of August, helped by hedge funds unwinding bearish trades that had benefited from market declines in the first half of the year.
However, Powell’s insistence that the US central bank would “keep at it until the job is done” and focus on taming inflation even in the face of stuttering economic growth renewed investor concerns about the effect of higher interest rates. The S&P 500 fell 4.2 per cent in August.
The tech-heavy Nasdaq Composite fell 0.6 per cent on Wednesday, bringing its loss since Powell’s speech to almost 7 per cent.
Rebalancing of portfolios can contribute to volatility on the last day of trading each month, and the Nasdaq swung between small gains and losses on Wednesday afternoon.
European shares also closed lower, with the regional Stoxx 600 gauge down 1.1 per cent after worse than expected eurozone inflation data for August. Figures published earlier in the session showed consumer price growth hit a record 9.1 per cent this month, higher than economists’ expectations of 9 per cent. July’s reading came in at 8.9 per cent.
That data propelled German and UK government bond yields even higher as investors continued to search for clues about how far and fast the ECB and the Bank of England would raise borrowing costs to tame inflation, which has been stoked by an escalating energy crisis.
Both debt markets closed out one of their worst-ever months. The 10-year German Bund yield, seen as a proxy for borrowing costs across the eurozone, has climbed more than 0.7 percentage points in August to trade at 1.54 per cent — reflecting its biggest monthly surge since 1990. The two-year Bund yield, which closely tracks interest rate expectations, posted its biggest jump in more than four decades, including a 0.05 percentage point increase on Wednesday to 1.1 per cent.
In the UK, short-dated gilt yields have added almost 1.3 percentage points in August, their steepest ascent since 1994, jumping 0.09 percentage points on Wednesday to 3.0 per cent. Bond yields rise as their prices fall.
“The further increases in headline and core inflation in August, and [the] likelihood that they will keep rising, will add to the pressure on the ECB to step up the pace of tightening. The balance of probabilities is shifting towards a 75 basis point hike next week,” wrote Jack Allen-Reynolds, senior European economist at Capital Economics, after the eurozone data release.
The ECB raised borrowing costs in July for the first time in more than a decade by an unexpectedly large 0.5 percentage points to zero.
Some economists have warned that eurozone inflation will move above 10 per cent in the autumn and stay higher for longer owing to surging gas prices. Futures contracts linked to TTF, Europe’s wholesale gas price, were down as much as 9.9 per cent at €239 a megawatt hour on Wednesday, before recouping their losses to finish 4.8 per cent higher.
Russia on Wednesday halted gas flows to Europe via the critical Nord Stream 1 pipeline as Gazprom started three days of planned maintenance on the line.
The 10-year benchmark Treasury yield rose 0.06 percentage points to 3.17 per cent.
Investors will closely scrutinize jobs data due out on Friday for evidence of a hotter labor market in the world’s largest economy — a scenario that may in turn spur the Fed to maintain its aggressive stance on monetary policy. Conversely, signs of cooling may prompt debate about the justification for raising rates into a recession.
Economists are expecting US employers to have added 300,000 new jobs in August, down from 528,000 last month.