US stocks are falling despite investors betting on a slowdown in the Fed rate hike

US stocks fell and Treasuries sold off on Friday after a mixed batch of bank earnings offset a further drop in inflation in December, reviving fears of a recession later this year.

The S&P 500 index, the leading stock on Wall Street, and the heavy Nasdaq Composite fell 0.4 percent in morning trading in New York. Auto stocks led the decline, with Ford down 6 percent and General Motors falling 4.6 percent after Tesla said it would cut its prices in the United States and Europe by a fifth. Tesla shares fell 3.2 percent.

The moves came after stock markets rebounded on Thursday on data showing annual US inflation fell for the sixth month in a row to 6.5 percent, the lowest CPI reading in a year. Price markets immediately price in the higher likelihood that the Fed will slow the pace of its monetary tightening at its next meeting in three weeks, with a 0.25 percentage point rise now expected to follow December’s half-percentage point increase.

“The Fed is nearing the end of its rate hike cycle, which we think is likely by the end of the first quarter,” said analysts at UBS Global Wealth Management. However, “a tight labor market” means that rates are unlikely to drop anytime soon, with the US unemployment rate at a 50-year low, job vacancies rising and the quitting rate — which correlates with the growth of wages” — too high to justify the Fed’s so-called pivot anytime soon.

However, figures from the Bureau of Labor Statistics show that average hourly earnings rose less than expected in December, while companies such as Amazon, Meta, Twitter and Goldman Sachs began to cut jobs.

US government bonds sold off on Friday, with the yield on two-year Treasury notes, which are particularly sensitive to interest rate expectations, rising 0.05 percentage point to 4.19 percent, after peaking at 4.7 percent in November.

Treasury yields tend to fall by 50 to 60 percent [basis points] On average, once the Fed is suspended, and with a final rate hike still expected two months away, that hike seems somewhat premature,” said analysts at JPMorgan.

Investors’ attention will now turn to the fourth-quarter earnings season, which kicked off Friday with a mixed set of results for some of America’s largest financial groups. Net income rose year-over-year at Bank of America and JPMorgan, while Wells Fargo’s quarterly earnings halved in the same period in 2021, and BlackRock posted a 15 percent drop in revenue.

Analysts at FactSet noted that market fears of a looming recession meant that last year analysts cut their earnings-per-share estimates for S&P 500 companies by 6.5 percent for the fourth quarter, a margin larger than average.

Even if inflation falls to above 4 percent late this year, allowing for looser monetary policy, “markets will still be challenged by earnings concerns,” said Seema Shah, chief global strategist at Principal Asset Management.

“If inflation plateaus there, the Fed won’t have much room to cut interest rates this year,” Shah added. “Not a great result, either way.”

A measure of the dollar’s strength against a basket of six other currencies rose 0.2 percent on Friday, after falling 0.9 percent in the previous session. The world’s de facto reserve currency has fallen about 10 percent over the past three months.

Elsewhere in equity markets, the European Stoxx 600 index added 0.5 percent, London’s FTSE 100 rose 0.6 percent to near an all-time high, and Germany’s DAX added 0.2 percent.

Hong Kong’s Hang Seng rose 1 percent, and China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks rose 1.4 percent. Data released on Friday shows that China’s exports suffered the biggest drop in nearly three years in December, falling 9.9 percent year-on-year in dollar terms.

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