US stocks notch quarterly drop against backdrop of Treasury sell-off
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US stocks registered their first negative quarter of 2023 on Friday, ruling off on a bumpy three months for equities and bonds as investors shifted to the likelihood that although inflationary pressures may be easing, interest rates will probably remain higher for longer.

Wall Street’s benchmark S&P 500 fell 0.3 on Friday and notched a 3.7 per cent decline since the end of June, its first negative quarter in 12 months. The tech-heavy Nasdaq Composite rose 0.1 per cent on Friday, but dropped 4.1 per cent drop in the quarter. That marked its biggest quarterly drop since the three months to the end of June 2022.

Friday’s moves came as US core personal consumption expenditures fell from 4.3 per cent in July to 3.9 per cent in August, the lowest level in almost two years for the inflation gauge, which is closely watched by policymakers.

“Inflation is continuing to decelerate, meaning the Fed’s aggressive campaign is working,” said Carol Schleif, chief investment officer at BMO Family Office. “The challenge is that core PCE remains almost double the Fed’s 2 per cent target, prompting the Fed to keep the possibility of another rate hike in play.”

John Williams, president of the Fed’s New York branch, on Friday said the central bank is “at, or near, the peak level” of its monetary tightening, and expects inflation to moderate to 2.5 per cent in 2024. However, the release last week of the Fed’s “dot plot” of interest rate estimates pointed to fewer rate cuts in 2024 and 2025.

The yield on the benchmark 10-year US Treasury, which this week hit its highest level since 2007, and had its biggest monthly jump in a year, slipped to 4.58 per cent on Friday. Yields were at 4.09 per cent at the end of August.

The two-year Treasury yield, which moves with interest rate expectations, inched up after the inflation data but remained lower on the day at 5.05 per cent. Bond yields move inversely to prices.

Investors also watched developments in Washington, where US lawmakers are trying to find a deal to avoid a government shutdown, which, among other outcomes, would suspend the publishing of federal economic data. On Monday, credit rating agency Moody’s said a shutdown would threaten the country’s triple A credit rating.

In Europe, the region-wide Stoxx 600 added 0.4 per cent, as did Germany’s Dax. London’s FTSE 100 rose 0.1 per cent after fresh data showed the UK economy recovered from the pandemic faster than previously estimated, while France’s CAC 40 index gained 0.3 per cent after domestic inflation increased at a slower annual pace than expected in September.

Yields on European sovereign debt slid, as investors welcomed data showing the eurozone’s harmonised index of consumer prices fell from 5.2 per cent in August to 4.3 per cent in September. Core inflation, which excludes energy and food and is closely watched by the European Central Bank, fell more than expected to 4.5 per cent, down from 5.3 per cent in August.

Italian 10-year government bond yields fell 0.17 percentage points to 4.75 per cent, having hit their highest level in a decade on Thursday. German 10-year bond yields dropped 0.14 percentage points to 2.82 per cent, having also hit a 10-year high during the previous trading session.

Despite expectations that inflation will slow, markets have been grappling with the prospect of interest rates remaining high for an extended period. Investors have also had to weigh the impact of surging oil prices, which have risen 35 per cent in the past two months on lower global output.

Brent crude futures settled slightly lower at $95.31 a barrel, while the US benchmark WTI contract dropped 1 per cent to $90.79.

Chinese tech stocks jumped on Friday after the country’s top internet regulator released a draft rule simplifying cross-border data transfers.

Hong Kong’s Hang Seng index rose 2.5 per cent, while the Hang Seng Tech index, a gauge tracking the top-30 technology companies, climbed 3.8 per cent.

Internet companies Tencent and Alibaba rose 3 per cent and 1.5 per cent respectively, while electric vehicle start-up Xpeng was up 4.7 per cent. Trading was closed in mainland China for a holiday.