US stocks seen falling as recession fears grow

6.30 am Spreading gloom

US stocks are expected to fall on Friday as investors brace for a recession in the world’s biggest economy in the wake of the Federal Reserve’s steep interest rate hikes.

Futures for the Dow Jones Industrial Average were down 0.7% in pre-market trading, while those for the S&P 500 lost 0.8%, and contracts for the Nasdaq-100 were 1.0% lower.

US rate setters hiked interest rates by 75 basis points (bp) on Wednesday and signaled that more hikes are likely as they try to cool inflation which remains near four-decade highs.

“The US Federal Reserve delivered its third 75bp hike. But the dot plot hinted at another jumbo hike before the end of the year. We are ending the week with nearly 75% chance of a fourth 75bp hike in November,” said Ipek Ozkardeskaya, senior analyst at Swissquote bank.

The specter of rising interest rates and the pain that would cause the wider economy is spooking investors, who expect the economy to become stuck in a prolonged recession. There is also growing doubt whether raising interest rates so aggressively is the right path for the economy when inflationary pressures are being driven by supply interruptions rather than spiraling demand.

US Fed chairman Jerome Powell stressed on Wednesday that controlling inflation remains the main challenge.

“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Powell was quoted as saying. His words were a stark reminder that more interest rate increases are looming and that the hoped-for soft landing for the US economy may not materialize.

A string of interest rate increases across developed markets only served to underscore that message.

Central banks from Sweden to the UK and Switzerland raised interest rates this week as they scrambled to fight runaway inflation levels. Their actions are expected to weigh on global economic growth.

Powell has the chance to fine-tune his message at a speaking engagement at 2pm ET today and investors will be watching closely.

On the data front, services and manufacturing sector PMIs for September, due at 9.45am ET, will offer some indication of whether the spate of interest rate hikes is already affecting activity.

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