Stocks and oil under pressure as markets eye US rate hike

Stocks were mixed, oil prices fell and the dollar rose on Thursday, as investors wondered what searing inflation figures released on Wednesday would mean for higher U.S. interest rates when the Federal Reserve will meet later this month.

Wall Street’s S&P 500 fell 0.4%, extending losses from the previous session, while the tech-heavy Nasdaq Composite was flat on the day. In Europe, the regional Stoxx 600 closed down 1.5%.

U.S. consumer prices rose to their fastest level in 40 years last month, according to a Bureau of Labor Statistics report released Wednesday, with the annual inflation rate beating economists’ forecasts to hit 9, 1%.

The data had initially fueled expectations of a much larger Fed interest rate hike at its July meeting, but those forecasts faded in afternoon trading after the Fed’s governor Fed chief Christopher Waller reiterated support for a three-quarters percentage point increase on Thursday.

Prior to Waller’s comments, investors in the futures market had predicted an over 80% chance that the Fed would make its first one-percentage-point interest rate hike since the central bank systematically began using the federal funds rate as the primary policy tool in the early 1990s. As of Thursday afternoon, those expectations were around 40%.

Falling rate hike expectations caused the two-year Treasury yield to drop slightly, down 0.01 percentage point to 3.13%. The yield, which moves with political expectations, had hit its highest level since mid-June on Wednesday.

Investors are still forecasting a gigantic 0.75 percentage point increase, which could slow the economy enough to tip it into recession.

“It’s not just about inflation,” said Salman Ahmed, global head of macro and strategic allocation at Fidelity International. “There is a significant slowdown in the pipeline. We believe that this slowdown in growth will turn into a recession.

Concerns about the health of the global economy pushed investors towards the dollar, traditionally seen as a safe haven in times of crisis. The dollar index, which measures the US currency against a basket of six others, rose 0.3%.

This further affected the euro, which fell 0.3% to trade just above $1. The common currency had weakened on Wednesday to parity with the greenback for the first time in 20 years. The Japanese yen also lost more than 1% to hit a 24-year low at ¥139.39.

Fears of an economic slowdown hit oil prices earlier in the day, with the price of Brent crude falling 5.1% to $94.50 a barrel, bringing the international oil benchmark back to levels seen for the last time before Russia invaded Ukraine in late February. But Brent then reversed much of those declines to settle down 0.47% on the day at $99.10.

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