US stocks fell for a second day with growth concerns in focus after Europe’s central bank became the latest to signal restrictive policies to combat inflation. The dollar gained and Treasury yields rose.

Selling accelerated in the last hour of trading, with the S&P 500 closing down 2.4 per cent in the biggest one-day drop in three weeks. The tech-heavy Nasdaq 100 underperformed, with Apple Inc., Meta Platforms Inc. and Amazon.com Inc. all down more than 3 per cent. 

In a widely anticipated move, the European Central Bank made no change to the deposit rate but prepared to hike by a quarter-point next month, and again by either that amount or more if inflation -- which now exceeds 8 per cent in the euro area -- warrants a tougher stance.

“If the ECB are even considering an outsized rate hike, I think that sort of says quite a lot about how concerned central banks are and should be about levels of inflation,” Fiona Cincotta, senior market analyst at City Index, said by phone. “Central banks are showing a willingness to act aggressively to get inflation back under control, and that is going to make the growth environment much more challenging.”

The dollar gained versus all of its major Group of 10 counterparts, amid signs of a pickup in demand for haven currencies with the yen and Swiss franc outperforming most of their peers. The euro dropped to the lowest in more than two weeks versus the greenback.

In the debt market, Treasuries fell across most maturities in sympathy with European peers, with benchmark yields holding above 3 per cent. The rate on German government 10-year bonds jumped seven basis points.

ECB policy makers have lagged global peers at the Federal Reserve, Bank of Canada and Reserve Bank of Australia which have embarked on aggressive campaigns to subdue runaway inflation this year, hiking in 50-basis point increments. 

On the inflation front, data due Friday will be closely watched for clues on the Fed’s rate path. The data is expected to show consumer prices picked up from a month ago, but eased slightly from a year earlier though stayed above 8 per cent. That will likely keep pressure on policy makers to stay the course on aggressive rate hikes. 

Market commentary on trading volumes, the ECB and growth outlook

• “With markets obsessively focused on the path of inflation, and gearing up for tomorrow’s CPI report, the ECB’s slow growth high inflation forecast has done little to ease fears of deepening stagflation,” Quincy Krosby, chief equity strategist for LPL Financial, said. “Certainly there are clear signs that the economy is softening following the Fed’s launch of interest-rate hikes, but the question remains if inflation can be reined in deeply enough without damaging the core of the US economy -- and corporate earnings as well.”
• “There’s a lot of sitting out and waiting. For the ones who believe things could be OK going forward, they are just waiting for some kind of confirmation of that so they can go back into the market,” Seema Shah, chief global strategist at Principal Global Investors, said in an interview. “And I think others who are really concerned are like, ‘I don’t want to get involved in a bear-market rally.’ So I think that is a moment of severe caution.”
• “There are wildly divergent opinions amongst economists and market participants as to the probability of a recession,” Matt Kishlansky, head of asset allocation at GenTrust, said in a note. “The most important point to make around the recession fears for me is that unlike some of the other recessions of our lifetimes, companies would be entering this one with their eyes wide open.”
• “To rein in surging prices the Fed has to increase rates, which can result in a recession,” Geir Lode, head of global equities at Federated Hermes, wrote in a note. “However, the pandemic-induced supply-chain shock and the Ukraine conflict are beyond the central bank’s control. In this environment we need to be lucky to avoid stagflation that could last for a long time.”

Oil ticked lower as renewed lockdowns in parts of Shanghai potentially dampen global fuel demand and ease pressure on tight markets. West Texas Intermediate futures traded fell, after spending the session hovering near a three-month high.

Key events to watch this week:

• US CPI, University of Michigan consumer sentiment Friday
• China CPI, PPI Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 2.4 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 2.7 per cent
• The Dow Jones Industrial Average fell 1.9 per cent
• The MSCI World index fell 2.1 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.7 per cent
• The euro fell 1 per cent to US$1.0613
• The British pound fell 0.4 per cent to US$1.2490
• The Japanese yen fell 0.1 per cent to 134.44 per dollar

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.04 per cent
• Germany’s 10-year yield advanced eight basis points to 1.43 per cent
• Britain’s 10-year yield advanced eight basis points to 2.32 per cent

Commodities

• West Texas Intermediate crude fell 0.6 per cent to US$121.36 a barrel
• Gold futures fell 0.4 per cent to US$1,849.70 an ounce