Stocks fall as inflation threatens to spin ‘out of control’

The pain at Target echoed Walmart’s equally bleak earnings outlook a day earlier. Shares of Walmart fell 11.4% on earnings and another 6.8% in U.S. trading on Wednesday. It was enough to push the S&P 500 at a loss of 4%, its worst session since June 2020.

Leading Melbourne-based hedge fund manager L1 Capital warned investors on Thursday that the days of easy returns fueled by record high interest rates were over.

“While interest rates have fallen from 18% to virtually zero over the past 30 years, asset prices have continued to rise by around 10% per year for stocks and real estate,” he said. Mark Landau, co-chief investment officer of L1 Capital. .

“We think those days are basically over and the return people should be able to get in the future will be much more modest.”

Although higher inflation expectations have taken root, Mr Landau warned that most investors have not adjusted their portfolios to reflect the severity of the spike in consumer prices. US inflation is still at its highest level in 40 years and has not moderated as quickly as expected.

Canada on Wednesday announced inflation at its highest level since 1991, up 6.8% in April on the annual measure. Earlier this week, UK inflation hit 9%, also the highest in 40 years, as Russia’s invasion of Ukraine comes under severe shock from energy prices in Europe.

Federal Reserve Chairman Jerome Powell said Wednesday that interest rates are likely to continue to rise until there is clear and convincing evidence of low inflation.

Walmart and Target The results come at a critical time for global markets, which are desperate to know how far central banks are willing to go to tame inflation.

Target President and CEO Brian Cornell told analysts that the speed at which soaring costs have upended the company’s outlook has shocked management.

“Like us [stood] before you and others in March, we did not anticipate the rapid changes we have seen over the past 60 days,” he said. “We didn’t expect transport and freight costs to skyrocket the way they did as fuel prices subsequently rose to all-time highs.”

Walmart CEO Doug McMillon issued an equally ominous warning: “There is a lot of uncertainty for the future. Things are very fluid.

Mr McMillon lamented the rising cost of staples such as milk, bread, canned tuna and macaroni and cheese. “On the food front, we are seeing double-digit inflation, and I fear inflation will continue to rise.”

Investors fear that the rise in interest rates needed to calm inflation could tip advanced economies into recession. This is despite nearly unprecedented unemployment rates around the world, including in the United States, where unemployment was stable at 3.6% in April.

“It must be said that the worry about inflation has never gone away since we entered 2022. However, although things have not reached the point of no return, they are apparently heading in a direction out of control,” IG Hebe analyst Chen said.

“That’s probably the most worrying part for the market.”

Australian dollar punished

The fierce sell-off in stocks sparked a sharp drop in the risk-sensitive Australian dollar, from which it partially recovered on Thursday following news that Shanghai will ease COVID-19 restrictions and allow some businesses to resume operations early June.

The currency jumped 1% to US70.23¢, after falling 1.1% in the overnight session. There was little enthusiasm in the forex market after Australia recorded its lowest unemployment rate in nearly 50 years.

Unemployment stood at 3.9% in April, compared to a revised 3.9% in March. This is the lowest unemployment rate since 1974.

The jobs report followed a slight disappointing result of the wage price index which increased by 2.4% during the March quarter, against 2.3%, missing forecast for a 2.5% gain.

“Added to yesterday’s disappointing payroll data, this suggests that a 25 basis point hike in cash rates at the June RBA meeting is more likely than an oversized 40-50 basis point hike. basis,” said ANZ chief economist Catherine Birch.

The Reserve Bank forecasts a further drop in unemployment to 3.8% by June and 3.7% by the end of the year.

Earlier this month, the RBA raised its then-record cash rate by 0.1% for the first time in more than a decade with an increase of 0.25 percentage points to 0.35%. He signaled further tightening to contain inflation.

Markets have since debated whether it will continue in June with a 25 or 40 basis point increase.

Bond futures are implying an 86% chance of moving a quarter point down to 0.6%, up from 100% earlier in the week. They are betting that the Reserve Bank will have to raise the exchange rate every month for the rest of the year to 2.6% by Christmas. If correct, it would also require at least one more size increase in the remaining seven political meetings.

Bond yields rose, with the three-year rate up 7 basis points to 2.99% and the 10-year rate up 9 basis points to 3.4% in a steepening yield curve.

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