By Herbert Lash and Lawrence White
NEW YORK/LONDON (Reuters) -U.S. and European shares tanked and the dollar surged on Monday as fears mounted that central bank efforts to tame rising consumer prices with inflation-busting interest-rate hikes will weaken the global economy and lead to a recession.
The three major Wall Street indexes plunged about 2% each as the benchmark European STOXX index closed down 1% after Russia’s Gazprom said it would halt natural gas supplies to Europe for three days at the end of the month.
Oil initially fell 4% as traders worried a slowdown would dent demand. The latest disruption to energy supplies in Europe heightened concerns about the continent’s economic outlook after hawkish signals from European Central Bank policymakers. Russian natural gas supplies to Europe are down around 75% year on year.
The inversion of the yield curve on U.S. Treasuries widened – a recession signal – as the market braced for remarks on Friday from Federal Reserve Chair Jerome Powell, who will discuss the Fed’s mission to keep inflation low at Jackson Hole, Wyoming.
The dollar strengthened, knocking the euro below parity at 0.9932 and pushing the Canadian dollar to breach 1.30 against the greenback. The dollar rally led gold prices to fall to their lowest level in nearly four weeks.
“Ahead of Jackson Hole the dollar is going to remain relatively firm, even though it’s overextended,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Despite a quick shift toward a more hawkish view of the Fed, “the market has this habit of reading Powell to be dovish. So, I see the risk of ‘buy the rumor,’ – the rumor of a hawkish Fed – and then sell it ‘on the fact,'” he said.
Fed funds futures are now pricing in a 54.5% chance of a 75 basis point hike by the Fed in September, instead of the greater probability of a smaller 50 basis point hike as were the market’s expectations going into the weekend.
A Reuters poll of economists taken Aug. 16-19 forecast the Fed will raise rates by 50 basis points in September, with the risks skewed towards a higher peak.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year notes inverted further at -30.8 basis points in a sign recession bets have increased.
“The inverted yield curve is signaling a massive ‘recession’ is upon us,” said Tom di Galoma, managing director at Seaport Global Holdings, in a note to investors. “Yield curve inversions are great predictors of recessions.”
On Wall Street, the Dow Jones Industrial Average fell 2.01%, the S&P 500 lost 2.23% and the Nasdaq Composite dropped 2.62%.
All 11 of the major S&P 500 sectors slid, with rate-sensitive information technology, consumer discretionary and communication services stocks the top three decliners, down close to 3% each.
Declining shares outnumbered those advancing by more than 5:1 on the New York Stock Exchange.
The S&P 500 has repeatedly failed to clear its 200-day moving average around 4,320, a sign of pulling out of a bear market.
The 10-year note rose 4.8 basis points in price to yield 3.0368%. [US/]
One exception to the tightening trend is China, where the central bank trimmed some key lending rates by between 5 and 15 basis points on Monday in a bid to support a slowing economy and a stressed housing sector.
Unease over China’s economy tipped the yuan to a 23-month low, while pressuring stocks across the region.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.02%, while its index of shares across the globe slid 1.55%.
Germany’s 10-year bond yield set a fresh four- week high of 1.314% as a key gauge of long-term euro zone inflation expectations hit a more than two-month high of 2.207%.
The ECB must keep raising rates even if a recession in Germany is increasingly likely, as inflation will stay uncomfortably high all through 2023, Bundesbank President Joachim Nagel said over the weekend.
Oil prices bounced off session lows to trade nearly flat in a volatile session after Saudi energy minister said the Organization of the Petroleum Exporting Countries and its allies could cut production to confront market challenges.
U.S. crude futures fell 54 cents to settle at $90.23 a barrel, while Brent settled down 24 cents at $96.48.
U.S. gold futures fell 0.8% to settle at $1,748.40 an ounce.
(Reporting by Herbert Lash and Lawrence White, additional reporting by Wayne Cole; Editing by Bernadette Baum, Kirsten Donovan and Catherine Evans)