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Wall Street stocks sank to a five-week low, and longer-term Treasury yields hit their highest level this year, as strong retail sales data stirred concerns that US interest rates could remain higher for longer.
Wall Street’s benchmark S&P 500 was down 0.8 per cent in afternoon trading, on track to hit its lowest level since mid-July. The technology-focused Nasdaq Composite dropped 0.7 per cent.
The yield on the 10-year US Treasury, which is more sensitive to expectations for economic growth, rose 0.04 percentage points to 4.22 per cent, its highest level since November 2022. The yield on the two-year government note fell 0.01 percentage points to 4.95 per cent. Yields rise when prices fall.
The moves came after data showed that the value of US retail purchases increased 0.7 per cent in July, up from 0.3 per cent in the previous month and well above the 0.4 per cent consensus forecast.
Signs of resilient consumer spending have been seen by some investors as evidence interest rates will stay high for an extended period. Inflation in the US has begun to fall in response to the Federal Reserve’s cycle of interest rate rises, but the central bank has insisted it will not start cutting rates any time soon.
“A good retail sales report will make the Fed less worried about recession risk and keep them focused on controlling inflation,” said Bill Adams, chief economist for Comerica Bank.
Also adding pressure to the broader US equities market, bank shares fell after an analyst from Fitch told CNBC that the agency was considering lowering multiple bank ratings. Shares of large lenders including JPMorgan Chase and Bank of America were down more than 2 per cent. The KBW Bank index shed 2.6 per cent.
Fitch’s warning followed the decision by rival credit agency Moody’s last week to downgrade a number of midsized banks, citing concerns about industry profitability.
Separately, shares of The Home Depot rose 0.7 per cent after the DIY retailer reported its sales declined less than expected in the second quarter.
Weakness in the US followed declines in Europe and Asia earlier in the day, which were exacerbated by concerns about China’s stuttering economy. The Europe-wide Stoxx Europe 600 fell 0.9 per cent to its lowest level since July 11, with the Cac 40 in Paris ending the day down 1.1 per cent.
The FTSE 100 was the biggest faller in Europe, down 1.6 per cent, after UK wage growth hit a record annual pace in the three months to June, adding to signs of persistent inflationary pressures.
Yields on two-year gilts rose 0.05 percentage points to 5.12 per cent, their highest level in a month, while yields on 10-year gilts edged up 0.02 percentage points to 4.58 per cent. Sterling was up 0.2 per cent against the dollar to $1.27.
“UK wage growth has come in quite a bit higher than expected, and that should all but cement a September rate hike from the Bank of England,” said James Smith, developed markets economist at ING.
Asian equities sold off as investors digested an unexpected move by the People’s Bank of China to lower its one-year medium-term lending facility rate, which affects loans to financial institutions.
The cut, by 0.15 percentage points to 2.5 per cent, took the rate to its lowest level since it was launched in 2014. The overwhelming majority of the market expected rates to remain unchanged. The Chinese renminbi declined 0.3 per cent against the dollar to trade at Rmb7.2838, its weakest level since November.
The surprise policy move came after data in China pointed to weak consumer and business activity in July, fuelling concern that the country was struggling to recover from three years of severe Covid-19 lockdowns.
“Today’s data add to evidence that China’s economy is stalling, despite the gradual ramp-up of policy support,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics, noting that the rate cut was probably “an attempt to shore up confidence, both in the financial markets and the broader economy”.
China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 0.2 per cent, while Hong Kong’s Hang Seng declined 1 per cent.
Additional reporting by Nicholas Megaw in New York
