CNBC Daily Open: Markets fall on hot economy – and possibility of 0.5% interest rate hikes

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US stocks are daunted by a still-hot economy — and the Fed’s hawkish rhetoric.

• US stocks fell on Thursday, dragged down by sharp declines in Microsoft, Disney and Tesla. Asia-Pacific markets followed, trading lower on Friday. Australia’s S&P/ASX 200 fell 0.81% after the country’s central bank hinted at further rate hikes.

• The US producer price index, which measures inflation at the wholesale level, rose 0.7% in January. This is the largest increase since June, and 0.3 percentage point more than economists had expected.

• China Renaissance, an investment bank that has advised mergers between major Chinese tech companies, is unable to contact its CEO Bao Fan. Chinese financial newspaper Caixin said Cong Lin, a former chairman of the bank’s subsidiary, was under investigation.

• Tesla is recalling 362,758 vehicles equipped with its experimental driver assistance software. The company has warned that the software, known as Full Self-Driving Beta, could cause vehicle crashes.

• PRO The crypto is making a comeback in 2023, according to Bernstein analyst Gautam Chhugani. Investors may view recent regulatory measures in the United States as less severe than they had expected.

Looking at January’s figures, the US economy is running at full speed. Quick recap: The lowest unemployment rate in 53 years. A rebound in consumer spending despite rising prices. And overnight, we discovered that the producer price index had risen the most in eight months. This almost bizarrely strong economy means that inflation – while still falling – remains uncomfortably high and sticky.

For a while, it looked like the markets could live with this – and even embrace it as a new normal, in which economic growth can comfortably exist with inflation above 2%. With each warmer-than-expected inflation report, markets rose.

Until yesterday. The markets finally gave way. The Dow Jones Industrial Average fell 1.26%, the S&P 500 lost 1.38% and the Nasdaq Composite fell 1.78%. “It should come as no surprise to see the market pause as hopes of a dovish Fed in the coming months fade,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley.

Indeed, it is not just that the doves of the Federal Reserve could fly away. It’s because the hawks are coming. Markets had widely anticipated and priced in interest rate hikes of 25 basis points for the next two Fed meetings. Yesterday, this forecast was strongly shaken.

St. Louis Federal Chairman James Bullard said Thursday that he “was a proponent of a 50 basis point hike and … argued that we should reach the rate level that the committee considers sufficiently restrictive.” as soon as possible”. Cleveland Fed President Loretta Mester echoed Bullard’s warmongering, saying she wanted bigger rate increases. Neither Mester nor Bullard are voting on the Federal Open Market Committee this year, but their sentiments could signal an increasingly determined Fed to stifle inflation.

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