On the financial markets, volatility returned through the front door on Friday. While Europe ended the day again in the red, Wall Street, which had sunk the day before, seemed set to regain balance. The CAC 40 ended the session down 1.73% to 6,258 points, while the DAX in Frankfurt dropped 1.64% and the EuroStoxx 50 1.82%. After a rocky week, investors tensed on reading the April US employment figures, released in the early afternoon.
In New York, the Stock Exchange began by continuing its tumble that began the day before before regaining its calm at the time of the European close. Around 6 p.m., the S&P 500 only dropped -0.43%, the Dow Jones -0.49% and the Nasdaq -0.60%. The VIX, also dubbed “the fear index”, peaked at more than 35 points in the afternoon – a rise of 10 points in just 24 hours – before falling back a little.
Investors were clearly nervous after the publication of US employment figures for April in the early afternoon. These show a still very tight labor market and wages close to very high levels. “These figures are good news for activity, but also indicate that, for the moment, the American Federal Reserve has no reason to adopt a more conciliatory tone”, summarizes Christian Parisot at Aurel BGC. Because a tight labor market and high wages are likely to amplify inflationary pressures.
Fed Chairman Jerome Powell said on Wednesday he was concerned that wages were rising at an unsustainable rate. The Fed will likely have to tighten monetary policy even further due to supply chain disruptions from the war in Ukraine and lockdowns in China, the Minneapolis Federal Reserve Chairman added. On Wednesday, the Fed had ruled out an increase of 75 basis points for the time being and was satisfied with an increase – already aggressive – of 50 basis points. But if the inflationary spiral gets out of control, the Fed will have no choice but to raise its rates very sharply, at the risk of stifling growth. The yield on 10-year Treasury bills rose 4 basis points to 3.08%.
“The real questions that are rocking the markets and to which no one has definitive answers are how far the Fed will have to raise its rates in 2023 to regain control of inflation and will that require a recession”, explained in start of the day Xavier Chapard, at LBPAM.
The Fed wants to believe that it will succeed in negotiating a soft landing for inflation without damaging growth. But to bring inflation down quickly, the risk is that the Fed will have to slow the economy down to a recession. “Janet Yellen, the former Fed Chair and current US Treasury Secretary, believes a soft landing scenario is possible but will ask the Fed to be ‘smart and also lucky’. It’s not very reassuring,” he concludes.
The Nasdaq, with strong technological coloring, had plunged Thursday by 4.99%, hit hard by the growing doubts of investors about American growth, which particularly penalizes tech stocks.
According to Bank of America, the slide in global markets that saw the S&P 500 post its worst first four months of the year since 1939 is not over. “The base scenario remains one of falling equities and rising yields, the climax of which has not yet been reached,” analysts told Bloomberg.