(Bloomberg) — Stocks dropped after paltry economic figures and a profit warning from the world’s largest retailer underscored the impacts of inflation pressures on consumer spending, with recession fears running rampant as the Federal Reserve gets ready to deliver another big rate hike.
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Economic barometer Walmart Inc. took a hit after a surprise cut to its outlook, while United Parcel Service Inc. slumped as package deliveries fell more than expected. The tech-heavy Nasdaq 100 underperformed, with giants Microsoft Corp. and Google’s parent Alphabet Inc. set to report their numbers after the market close. Treasury yields slid and the dollar rose.
Traders also braced for another 75-basis-point hike by Fed officials on Wednesday, with a combined increase of 150 basis points over June and July representing the steepest rise in rates since the early 1980s when then chairman Paul Volcker was battling sky-high inflation. Dimming views on the economy sank US consumer confidence to the lowest level since February 2021, while a gauge of new home sales fell for the fifth time this year.
“A soft landing feels like a long shot from here,” wrote Seema Shah, chief global strategist at Principal Global Investors. “In the last 11 tightening cycles, the Fed has only skirted recession three times (1965, 1984 and 1994). In each of those cycles, inflation was lower and the Fed funds rate was meaningfully higher at the point of liftoff, so Fed tightening didn’t need to be as dramatic as it does today.”
Read: IMF Cuts World GDP Outlook a Third Time as Inflation, Rates Jump
The Fed’s rate hikes are wearing out their welcome in bond markets, with a measure of the yield curve that Chair Jerome Powell has highlighted as a recession indicator sending out a warning message. The difference between rates on where three-month bills are now and where they will be in 18 months has tumbled about 95 basis points in July, the biggest monthly decline in data starting in 1996.
US officials are likely to stay hawkish for longer amid persistently high inflation, according to Goldman Sachs Group Inc. strategists, the latest to enter the debate around a potential central bank pivot as growth slows. Their opinion aligns with Morgan Stanley’s Michael Wilson, who also said Monday it’s too early to expect the Fed to stop hiking. Meantime, JPMorgan Chase & Co. strategists noted bets that prices have peaked will lead to a Fed pivot and improve the picture for equities in the second half.
Other corporate highlights:
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General Electric Co. beat Wall Street’s expectations for profit and reported surprise positive cash flow as sales at the key jet-engine division soared, buoying the conglomerate despite supply woes that continue to pressure the balance sheet.
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General Motors Co. reported weaker profit than analysts’ estimated as semiconductor shortages kept production volumes in check. The automaker also warned it is bracing for tougher times ahead.
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McDonald’s Corp. reported sales that topped estimates as consumers continue eating out despite higher prices.
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Coca-Cola Co.’s sales exceeded expectations and the company raised its full-year guidance.
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3M Co. plans to spin off its multibillion-dollar health-care operations, a move that could leave the manufacturer flush with cash as it copes with shifting economic currents that have sapped its profits.
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Archer-Daniels-Midland Co. posted its highest profit ever for a second quarter as soybean processing boosted earnings.
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Alibaba Group Holding Ltd. will seek a primary listing in Hong Kong, entrenching the financial hub’s status as an alternative to US markets ahead of a potential exodus of Chinese companies from New York.
The annual summer lull combined with steadily deteriorating economic conditions and recession fears are also keeping junk-bond borrowers on the sidelines, with the month-to-date supply at $1.06 billion, the slowest July at least since 2006.
Here are some key events to watch this week:
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Alphabet, Apple, Amazon, Microsoft, Meta earnings due this week
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Fed policy decision, briefing, Wednesday
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Australia CPI, Wednesday
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US GDP, Thursday
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Euro-area CPI, Friday
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US PCE deflator, personal income, University of Michigan consumer sentiment, Friday
Musk, Tesla and Twitter are this week’s theme of the MLIV Pulse survey. Also share your views on the S&P 500’s biggest stocks. Click here to get involved anonymously.
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.8% as of 10:33 a.m. New York time
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The Nasdaq 100 fell 1.5%
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The Dow Jones Industrial Average fell 0.3%
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The Stoxx Europe 600 fell 0.2%
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The MSCI World index fell 0.7%
Currencies
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The Bloomberg Dollar Spot Index rose 0.3%
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The euro fell 0.8% to $1.0142
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The British pound was little changed at $1.2033
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The Japanese yen was little changed at 136.60 per dollar
Bonds
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The yield on 10-year Treasuries declined five basis points to 2.74%
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Germany’s 10-year yield declined nine basis points to 0.93%
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Britain’s 10-year yield declined three basis points to 1.91%
Commodities
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