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Markets Fluctuate at the End of a Shaky Week

Persistent pullbacks in recent sessions reflect investors’ worries about stubbornly high inflation.

S&P 500

Oct. 30

Oct. 31

4,140

4,150

4,160

4,170

4,180

4,190

Data delayed at least 15 minutes

Source: FactSet

By: Ella Koeze

Stock prices wobbled on Friday after persistent pullbacks over the week reflected how investors have grown increasingly nervous that stubbornly high inflation could push the Federal Reserve to keep interest rates high for a long time, raising the risk of a severe economic downturn.

The S&P 500 fluctuated between gains and losses on Friday, before ending the day 0.7 percent lower. The drop took the index to a 3.4 percent fall for the week after declines on Monday, Tuesday and Wednesday, which makes it the largest one week fall since mid-September. The index has fallen on eight of the past 10 full trading days.

A gauge of wholesale prices rose more than expected on Friday, undercutting previous signs of inflation slowing down. The Producer Price Index rose by 0.3 percent in November, above the 0.2 percent expected by economists. For the year through November, the index rose by 7.4 percent, lower than October’s reading but still above expectations.

The fresh data added to strong jobs numbers at the end of last week and better-than-expected survey data about business at services companies, highlighting the resilience of some parts of the economy in the face of the Fed’s relentless efforts to reduce inflation through higher interest rates.

“I think there is a bit more realism creeping back into markets” that the process of lowering inflation will not be painless, said Ron Temple, chief market strategist at Lazard. “The equity market still doesn’t fully reflect the challenges ahead.”

Higher interest rates help slow economic activity by raising costs for consumers and companies, and investors had become hopeful that signs of slowing inflation could prompt the Fed to let up on the pace of increases. That helped push the stock market higher in recent weeks, leaving the S&P more than 10 percent above its low in October, even after this week’s decline.

Investors still expect the Fed to raise interest rates less aggressively starting at its meeting next week, but the concern is that the central bank could leave interest rates at high levels for an extended period, if inflation remains stubborn. That, in turn, raises the risk that the economy could tip into a recession.

“As we speak to company management teams, clearly inflationary pressures are abating, from input costs to supply chain pressures, and in some cases demand and wages,” said Matt Peron, director of research at Janus Henderson Investors. “However, that is not yet being reflected in the official inflation statistics, including this morning’s P.P.I. This may keep some pressure on the Fed to maintain higher policy rates and as a result will pressure equity prices in the near term.”

Futures contracts that show how high traders think interest rates will rise by June next year climbed toward 5 percent this week, having fallen close to 4.9 percent by the end of last week.

Rising short-term interest rates have also upended the usual order of the bond market, prompting one of Wall Street’s most widely watched recession indicators, known as an inverted yield curve. Typically, investors expect to be paid more interest for lending money for a longer period. But short-dated Treasury yields now sit well above longer-dated yields, as investors bet the Fed’s rate increases will prompt an economic downturn and force the central bank to eventually cut interest rates to help prop up an ailing economy.

“The yield curve is sending you the message that the Fed is over-tightening,” said Luca Paolini, chief strategist at Pictet Asset Management.

In another sign of slowing demand — though that is one more welcome to consumers who have struggled with soaring energy prices — U.S. gasoline prices fell below year-ago levels on Thursday, down sharply from the record highs reached in the summer.

Energy prices have been an important driver of rising prices, so as they fall, investors are hopeful that broader-based measures of inflation will also decline.

The price of West Texas Intermediate crude oil, the U.S. benchmark, also fell to its lowest level of the year on Thursday, crossing under $72 per barrel. On Friday, it fell by 0.6 percent, to $71.02 per barrel.

Investors’ attention will now turn to next week, with an important update on consumer price inflation coming the day before the Fed’s next announcement on interest rates on Wednesday.

Joe Rennison covers financial markets and trading, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders. More about Joe Rennison

Isabella Simonetti is the 2022 David Carr Fellow at The New York Times. More about Isabella Simonetti

A version of this article appears in print on  , Section B, Page 2 of the New York edition with the headline: Markets Fluctuate at End of Shaky Week. Order Reprints | Today’s Paper | Subscribe

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