The stock rally that followed the Federal Reserve’s decision proved to be short-lived ahead of Friday’s jobs report, as traders worried officials might struggle to fight inflation amid the threat of a recession.
Just one day after posting its biggest rise in two years, the S&P 500 is down, with more than 95 percent of its companies down. The Nasdaq 100 index suffered one of its sharpest turns ever. The tech index fell about 5 percent, erasing the post-Fed gains. The sell-off in long-term Treasuries pushed the 10-year bond yield above 3 per cent. The dollar rose.
Doubts that policy makers can stop runaway prices have rocked markets, with the potential for stagflation and stagflation unsettling investors. By undoing the massive 75 basis point rally in June, Fed Chairman Jerome Powell beat the expectations of more aggressive traders. However, the road ahead remains bumpy, with pivotal economic data and global developments that could cast doubt on the central bank’s approach. Friday’s jobs reading is expected to show strong salary growth and wages at exceptionally high levels – remaining a constant source of inflationary pressures.
- “I was expecting some selling, but the big vomiting that is happening I wasn’t expecting,” said Kim Forrest, founder and chief investment officer at Bouquet Capital Partners. “Is this a surrender? I remember the feeling of giving up — that kind of feeling like giving up, when everything, even good names, are left out.”
- “It will be very difficult for the Fed to normalize interest rates without having a negative impact on growth and earnings,” said Paul Nolte, portfolio manager at Kingsview Investment Management. “So the stock prices are very high if we are going to see stability or a decline in earnings per share.”
- “Make no mistake, the Fed is in the early stages of what we think is going to be a very severe tightening cycle,” wrote Wayne Thein, global head of currency strategy at Brown Brothers Harriman.
Certainly, higher swings in long-term yields are important to the broader economic picture because they affect borrowing costs. US mortgage rates resumed their upward climb, reaching their highest level since August 2009. Separate data on Thursday showed that productivity fell in the first quarter by the most since 1947 as the economy contracted, while labor costs rose and a tight labor market showed.
- Shares of e-commerce companies from Etsy Inc. To Shopify Inc. After weaker-than-expected quarterly earnings, deep fears of a slowdown in online shopping were predicted.
- eBay has given a lackluster sales and profit forecast for the current quarter, accelerating its decline from peaks reached when shoppers were stuck at home during the pandemic.
- Elon Musk has secured about $7.1 billion in new funding commitments, including from billionaire Larry Ellison, the Saudi prince, and Sequoia Capital, to help fund his proposed acquisition of Twitter Inc. valued at $44 billion.
Elsewhere, sterling fell as investors looked beyond the Bank of England rate hike and shifted their focus to expectations of a recession in 2023. Bank of England Governor Andrew Bailey said the British economy is already slowing due to pressure on consumers’ purchasing power, and this will help reduce inflation next year.
Some of the main movements in the markets:
- The S&P 500 was down 3.5 percent as of 4 p.m. New York time
- The Nasdaq 100 index fell 5.1 percent
- The Dow Jones Industrial Average fell 3.1 percent
- The MSCI Global Index fell 2.5 percent
- The Bloomberg Spot Dollar Index rose 0.9 percent
- The euro fell 0.7 percent to 1.0550 US dollars
- The British pound fell 2.1 percent to $1.2365
- The Japanese yen fell 0.7 percent to 130.03 per dollar
- The yield on the 10-year Treasury bond advanced 11 basis points to 3.04 percent
- The German 10-year bond yield advanced seven basis points to 1.04 percent
- The UK 10-year bond yield was little changed at 1.96 per cent
- West Texas Intermediate crude rose 0.4 percent to $108.26 a barrel
- Gold futures rose 0.5% to $1878.60 an ounce