Stocks Edge Down After ECB Sets Plan to Raise Rates

US stock benchmarks wavered as investors digested the European Central Bank’s plan to begin increasing interest rates next month.

The S&P 500 fell 0.6% in early trading Thursday and the Dow Jones Industrial Average slipped 0.5%. The technology-focused Nasdaq Composite Index also fell 0.5%. Earlier, the major indexes opened lower before briefly turning positive.

For much of this year, investors have been positioning their portfolios to account for the end of easy-money conditions in the US But now, traders must account for tighter policy in the eurozone as well.

The ECB said Thursday it would increase its key interest rate from minus 0.5% to zero or higher by September, and probably further after that. The central bank indicated that it plans to start with a quarter-percentage point increase in July. It also said it would end its large-scale bond-buying program on July 1.

In both the US and Europe, the announcement sent stocks falling. The pan-continental Stoxx Europe 600 lost about 1%. The euro advanced against the dollar, rising 0.3%, reversing earlier losses. Government bonds in Germany and the US slide, sending yields higher.

The moves by central banks in the US and Europe come as inflation around the world continues to weigh on households. On Friday, investors will get a fresh picture of inflation in the US when consumer-price index data for May are released. Economists surveyed by The Wall Street Journal expect the reading to show that inflation in the US held steady at 8.3% in May, the same annual rate notched for April.

Traders and strategists say the inflation data could heavily influence the next stretch of trading for markets, and help shape the Federal Reserve’s interest-rate decisions for later this year. The Fed’s June meeting will occur next week, and the central bank is widely expected to raise its key interest rate by a half-percentage point—a move it is expected to replicate in July.

“The concern here in the US is the Fed tightening into an economy that is already showing signs of a slowdown,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. “The ECB is tightening into an even more pronounced slowdown; that could impact global growth, which in turn could be another headwind for company earnings.”

Much of the debate in markets has shifted to what the Fed might do at its meeting in September. Until a more clear picture emerges, some traders have been unwilling to make big bets in the market, investors and strategists say.

Some strategists say that has led to more choppy trading in recent sessions as they try to determine whether this year’s market selloff has bottomed, or if more pain could be ahead. Many are also factoring in the possibility of an eventual US recession.

“People are not having any conviction one way or another and are taking chips off the table,” said Viraj Patel, global macro strategist at Vanda Research. “They are not wanting to get caught offside in either direction.”

Treasury Secretary Janet Yellen faced questions from the Senate Finance Committee Tuesday on the high rate of inflation in the US and whether the Covid-19 rescue package played a role. Photo: Nicholas Kamm/AFP/Getty Images

In trading in New York, shares of Tesla added 5% after UBS upgraded the stock to buy from neutral, putting the electric-vehicle maker on pace to extend its rally into a fourth day. Tesla shares have been battered this year, falling 31% through Wednesday, as investors dumped shares of growth companies. The stock has also been affected by Chief Executive Elon Musk’s plan to purchase Twitter.

US-traded shares of Alibaba Group Holding lost 3.7% after the China Securities Regulatory Commission denied a report that it was working on a potential revival of Ant Group’s initial public offering.

Shares of Five Below fell 3.6% after the discount retailer reported a decline in first-quarter profits as operating costs climbed.

In the Treasury market, the yield on the benchmark 10-year Treasury advanced to 3.043%, from 3.028% Wednesday. Yields and bond prices move inversely.

In energy markets, Brent crude, the international benchmark for oil prices, edged higher 0.03% to $123.62 a barrel, after notching a two-day rally Wednesday. Oil prices have moved higher recently amid China’s emergence from Covid-19 lockdowns and as traders continue to assess potential supply disruptions due to the war in Ukraine.

A trader worked on the floor of the New York Stock Exchange on Wednesday.


Photo:

Alyssa Ringler/Associated Press

In Asia, China’s Shanghai Composite lost 0.8%, despite data showing that the country’s exports rebounded strongly in May. Hong Kong’s Hang Seng lost 0.7%, while Japan’s Nikkei 225 ended roughly flat.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

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