Wall Street slumps fearing Fed's inflation-fighting turn

<p>Kia ora,</p><p>Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the International edition from Interest.co.nz.</p><p>Today we lead with news that markets now realise they need to reprice much more substantially, as the Fed is about to move to inflation-fighting mode again.</p><p>Wall Street has started its week with a severe case of the jitters. The S&P500 is down -3.6% in late afternoon trade and falling. That means for 2022 it is down -11.6% and in almost exclusively one-way traffic and you may recall it started the year at an all-time high. The NASDAQ is down -4.5% so far today, and the Dow down -3.0%, so it is a broad-based retreat, led by tech stocks.</p><p>The bond market is rallying in a minor but unconvincing way. The currency markets are in full risk-off mode.</p><p>The <a href="https://www.markiteconomics.com/Public/Home/PressRelease/c4392f13105a4995984fc407bfac69e9" target="_blank"><strong>early report</strong></a> on January factory activity sees a small pull-back in their strong expansion but it is still healthy. But the services sector reported a much sharper pullback in January, barely expanding now after a strong run. Supply delays and Omicron-worsened labour shortages are getting the blame.</p><p>More or less confirming the PMI data, the Chicago Fed's <a href="https://www.interest.co.nz/sites/default/files/2022-01/cfnai-december2021-pdf%20%281%29.pdf" target="_blank"><strong>National Activity Index</strong></a> dropped below expansion territory to -0.15 in December from an upwardly revised and strong +0.44 in the previous month, suggesting there was a contraction in economic activity in December following a two-month period of expansion. It is their first decline since April 2021.</p><p><a href="https://www.markiteconomics.com/Public/Home/PressRelease/9a43ee0ed79449278396360346e98ee4" target="_blank"><strong>The story in Japan is similar</strong></a>, with a sharpish contraction in their serv