Stocks fall as Fed officials anticipate bigger gains: Markets Wrap

(Bloomberg) — US stock indexes closed firmly in the red on Thursday after two Federal Reserve officials said they were considering raising interest rates by 50 basis points to combat persistently high inflation.

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The S&P 500 Index fell 1.4% and the Nasdaq 100 fell 1.9%. The benchmark 10-year Treasury yield rose over 3.8% to its highest level this year.

Federal Reserve Bank of Cleveland President Loretta Mester said she saw a “compelling economic case” for introducing another 50 basis point hike, and St. Louis President James Bullard said he would support a hike by half a percentage point does not rule out the March Fed meeting, rather than a quarter point.

Their warnings came after US producer prices rebounded the most since June in January. Home construction fell for a fifth month in January as high mortgage rates continue to dampen housing demand. Weekly jobless claims fell to 194k, below expectations of 200k.

“You’re not going to see 2% inflation in a job that tight like this,” Steve Chiavarone, senior portfolio manager and head of multi-asset solutions at Federated Hermes, said over the phone. “It got so completely out of hand.”

“I think the data coming in is confusing for many investors and for the market as a whole,” said Kristen Bitterly, head of North America investments at Citi Global Wealth, in an interview. “We think the rally that we’ve seen is actually a very technical rally. It’s not based on fundamentals, so we don’t buy at those levels.”

“Overall, layoffs remain small, suggesting companies are reluctant to downsize their workforce for now,” wrote Rubeela Farooqi, chief US economist at High Frequency Economics. “A rapid increase in interest rates has not yet had an impact on the labor market. But an adjustment is likely in the coming months as the cumulative and lagged effects of tightening monetary policy spread more broadly across the economy.”

The story goes on

Thursday’s economic data added more details for Fed policymakers charting the path for rate hikes after US retail sales on Wednesday rose the fastest in nearly two years in January.

Investors have increased their bets on how far the Fed will hike rates in this tightening cycle. According to trading in the US money markets, they now see the Federal Funds Rate rising over 5.2% in July. This contrasts with a perceived peak interest rate of 4.9% just two weeks ago and the central bank’s current target range of 4.5% to 4.75%.

The Dow Jones Industrial Average fell 1.3%. So far this year, the 30-piece blue-chip indicator is up about 2%, compared to about 7% gains for the S&P 500. The 5 percentage point gap between the two makes the Dow’s year-opener the weakest of the S&P relative to the rest of the year 500 since 1934, according to data compiled by Bloomberg.

Bitcoin optimism continued as the cryptocurrency briefly surpassed $25,000 for the first time since August as traders’ fears of a crackdown by US regulators eased.

Oil futures fell as investors weighed evidence of higher energy demand in China against a sharp rise in US crude inventories. Gold was stable.

Key Events:

Some of the key movements in the markets:

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• The S&P 500 fell 1.4%, more than any closing loss since 4 p.m. ET on Jan. 18

• The Nasdaq 100 fell 1.9%, more than any closing loss since Jan. 30

• The Dow Jones Industrial Average fell 1.3%, more than any closing loss since Jan. 18

• The MSCI World Index has hardly changed

currencies

• The Bloomberg Dollar Spot Index rose 0.1% to its highest level since Jan. 6

• The euro fell 0.1% to $1.0675

• The British pound fell 0.3% to $1.1993

• The Japanese yen is up 0.2%, more than any closing gain since February 7th

cryptocurrencies

Bind

• The 10-year government bond yield rose five basis points to 3.85%

• Germany’s 10-year yield was little changed at 2.48%

• The 10-year UK government bond yield rose one basis point to 3.50%

raw materials

This story was created with the support of Bloomberg Automation.

–Assisted by Elena Popina, Cristin Flanagan and Angel Adegbesan.

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