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North American stock markets ended lower Wednesday after a volatile session in which investors grew even more convinced an economic slowdown is nearing given an unexpectedly large interest rate hike in Canada and a surprisingly hot inflation reading in the U.S.

Those jitters over a recession were on full display in the bond market in particular.

The inversion on the U.S. two-year/10-year yield curve accelerated to as much as 24.40 basis points, the most inverted in nearly 22 years, Refinitiv data showed. Canadian bond yields are also inverted across much of the curve, including on the two year/10-year spread.

Yield curve inversions - an unusual state where longer-term issues pay out less than short-term ones - are widely seen as precursors to recessions.

Expectations are growing that the U.S. Fed could hike by 100 basis points at its next policy meeting - matching what the Bank of Canada did on Wednesday - after data showed the annual U.S. inflation rate reached a more than 40-year peak in June.

“The difficult situation is that the Fed is forced to react to this strong inflation data to prevent inflation expectations from moving too much higher,” said Brian Smedley, chief economist and head of macroeconomic and investment research at Guggenheim Partners in New York.

“At the same time, the forward-looking indicators on the economic outlook have deteriorated rapidly. They’re hiking aggressively into an economic slowdown,” he added.

Year-on-year consumer price growth accelerated to a scorching 9.1%, the hottest reading since November 1981, driven by an 11.2% monthly spike in gasoline prices.

Stripping away volatile food and energy prices, which have abated since the report’s survey period, core CPI cooled down to an annual rate of 5.9%.

“You would expect the CPI (report) that we saw would be a big risk-off event, but the market has shrugged,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “(Investors) were already expecting a very hawkish Fed and I don’t think this affects much except uncertainty.”

The question over whether the Fed’s policy tightening could rein in inflation without tipping the economy into recession appears to be shifting to how severe the downturn is likely to be.

Federal funds futures, which reflect traders’ bets on monetary policy, Wednesday showed a 70% chance of a supersized 100 basis points rise at the coming Fed meeting, compared with a roughly one-in-nine chance before the inflation report, according to data from the CME Group.

“It’s most likely we’re going to have a recession because the Fed is going to have to act aggressively,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“Unfortunately we were looking for good news and this is not good news,” he said of Wednesday’s inflation report.

The report fueled sharp swings in stocks, with the benchmark S&P 500 index falling as much as 1.6% before climbing into positive territory. It ended down 0.45% for the day and is off more than 20% this year.

Recession worries have grown over the last few weeks, with several Wall Street banks calling for an increased chance of an economic downturn brought on by a hawkish, inflation-fighting Fed. The International Monetary Fund on Tuesday warned that avoiding recession in the United States will be “increasingly challenging” as it again cut its 2022 U.S. growth forecast.

The hawkish outlook for the Fed compared to many other global central banks also rippled through currency markets, with the U.S. dollar surging to a 20-year high against a basket of currencies while the euro broke below parity against the greenback.

Some analysts said inflation could start to cool in the coming months, noting a recent drop in commodity prices.

Peter Cardillo, chief market economist at Spartan Capital Securities, said “the numbers are ugly” but added that “the hints that inflation might be beginning to decelerate are there.”

Investors are now turning to second-quarter earnings season, which is just starting, to reinvigorate the market.

S&P 500 earnings are expected to have climbed 5.7% from the year-ago period, but investors are skeptical companies will be able to achieve those estimates given the uncertain economic outlook, including high inflation that is raising costs for both consumers and businesses.

“We look for further market volatility as investors digest the combination of slowing growth, persistent inflation, and the likelihood that second quarter earnings season results in downward revisions for margins and profits,” John Lynch, chief investment officer at Comerica Wealth Management, said in emailed comments.

The S&P/TSX composite index ended down 63.45 points, or 0.3%, at 18,615.19, its lowest closing level since March 2021 and the fourth straight day of declines.

Since the start of the year, the index has fallen 12.3%, putting it on track for the biggest annual loss since 2008.

The financial services sector, which has a 31% weighting on the Toronto market, fell 1.2%, while industrials ended 1.1% lower.

Energy dipped 0.3% even as the price of oil clawed back a small part of its recent declines. U.S. crude oil futures settled 0.5% higher at $96.30 a barrel.

The materials group, which includes precious and base metals miners and fertilizer companies, added 1.2% as gold and copper prices rose. Consumer staples ended 1.8% higher.

On Wall Street, nine of the 11 major sectors of the S&P 500 lost ground, with industrials and communications services suffering the largest percentage drop, while consumer discretionary enjoyed the biggest gain.

Shares of Delta Air Lines slid 4.5% after the carrier’s second-quarter earnings missed expectations, although Chief Executive Ed Bastian said strong travel demand will result in “meaningful” full-year profit.

Twitter Inc jumped 7.9% after Hindenburg Research said it had taken a significant long position in company’s stock.

Declining issues outnumbered advancers on the NYSE by a 1.37-to-1 ratio; on Nasdaq, a 1.08-to-1 ratio favored decliners. The S&P 500 posted one new 52-week high and 41 new lows; the Nasdaq Composite recorded 16 new highs and 231 new lows. Volume on U.S. exchanges was 10.66 billion shares, compared with the 12.56 billion average over the last 20 trading days.

Reuters, Globe staff

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