Wall Street stocks faltered on Tuesday as strong housing data raised the prospect of higher interest rates overtaking a week-long rally in U.S. stocks.
The benchmark S&P 500 closed down 0.5% while the tech-heavy Nasdaq Composite ended down 0.2% after a federal holiday on Monday.
The weakness followed an unexpected surge in new home construction that pushed housing starts to their highest level in more than a year. Economists had forecast a slight decline, anticipating that homebuyers would be deterred by high borrowing costs, so the data suggested domestic demand was strong enough that the Federal Reserve was tempted to raise rates further. of interest in its efforts to calm inflation.
The US central bank opted to pause its tightening campaign at last week’s Federal Open Market Committee meeting, but signaled two more rate hikes this year. Fed Chairman Jay Powell is scheduled to appear before the House Financial Services Committee on Wednesday to give his semiannual testimony, which will be watched closely for clues about his thinking on interest rates.
Tuesday’s US weakness followed a week in which the S&P hit a technical bull market – defined as a 20% rally from its low – sparking debate over the sustainability of the gains, which were heavily led by advances in actions linked to artificial intelligence. .
Thomas Mathews, senior markets economist at Capital Economics, said “the growing enthusiasm for AI will (not) be enough to keep the S&P 500 from falling if (. . . ) the US economy falls into recession further later this year.”
In Europe, the regional Stoxx 600 and Germany’s Dax both ended the day down 0.6%, while London’s FTSE 100 lost 0.3%.
Commodity stocks were the losers in the region, with the Stoxx 600 Basic Resources Index falling for the fourth straight session as investors feared China’s slow economic recovery could dampen demand.
The moves came after the People’s Bank of China lowered the country’s five-year mortgage prime rate to 4.2% from 4.3%, which fell short of investors’ expectations of a 0-0 cut. .15 percentage points.
China’s benchmark CSI 300 stock index fell 0.2% after the announcement, led by losses in property stocks. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong fell 1.5%.
“The risk with this step-down approach to rate cuts is that potential buyers will expect further mortgage cuts and therefore delay their purchases, depressing home sales activity,” said Duncan Wrigley, economist Chief for China at Pantheon Macroeconomics.
Chinese policymakers also cut the country’s one-year prime lending rate by 0.1 percentage point to 3.55% in a bid to support growth in the world’s second-largest economy after three years of severe Covid-19 restrictions. .
In the UK, traders braced for the release of inflation data on Wednesday and a monetary policy decision from the Bank of England on Thursday. Markets expect the central bank to raise rates to 4.75%, a 15-year high.
The annual rate of consumer price inflation is expected to have eased slightly to 8.4% in May, from 8.7% in April, remaining above that of Europe and the United States and far exceeding the BoE’s 2% target.
Yields on two-year gilts, which are sensitive to changes in interest rates, fell 0.13 percentage points to 4.95%, after hitting their highest level since 2008 in the previous session. Yields on the benchmark 10-year note were 0.16 percentage points lower at 4.33%. Bond yields fall as prices rise.