US stocks fell slightly in the aftermath of the Fed’s third rate hike

By Isabel Wang and Joseph Adinolfi

2-Year Treasury Yield Surpasses Highest Level in Nearly 15 Years

U.S. stocks traded lower on Thursday afternoon as Treasury yields and the dollar climbed further a day after the Federal Reserve announced a third interest rate hike and announced more to come.

What is happening

Stocks ended sharply lower on Wednesday after a volatile session, with the Dow Jones Industrial Average losing 522 points, or 1.7%, while the S&P 500 fell 1.7% and the Nasdaq Composite fell 1.8 %. The S&P 500 is down more than 21% for the year and the Nasdaq Composite has lost around 29% over this period.

What drives the markets?

US stocks fell again after Wednesday’s selloff after the Federal Reserve produced another 75 basis point rate hike and reiterated its commitment to crush inflation, even if that means plunging the US economy in a recession.

“We will continue until the job is done,” Chairman Jerome Powell told a news conference on Wednesday after the Fed raised its key interest rate for the third straight time by 75 basis points. in a range of 3% to 3.25. %. “I wish there was a painless way to do it. There isn’t,” he added.

Investors were rattled by the Fed’s so-called dot chart, which tracks individual policymakers’ benchmark interest rate forecasts. It produced a median forecast for a peak federal funds rate of 4.6% in 2023, above market expectations. The Fed forecast also implied that unemployment could rise significantly and the economy would slow sharply.

See: Fed predicts major economic slowdown and rising unemployment as it battles inflation

“Powell failed to give the market light at the end of the tunnel,” wrote Jeff Bierman, chief market technician at TheoTrade in emailed comments. “Even if he would have said 5% or 4.5%, the market would have calmed down because the fund managers would have an anchor data point. Instead, he left the market guessing once again , with no deadline for when the Fed will do away with QT.”

Read: Stock market fell because Jerome Powell’s Fed ‘won’t blink’

Bond yields hit multi-year highs, with the 2-year Treasury yield still above its highest level since 2007. The 10-year Treasury yield reached 3.680%.

Rhys Williams, chief strategist at Spouting Rock Asset Management, said markets will go lower in the near term as “most of the correction is behind us.”

“Especially in a time of quantitative tightening, where you’ve lost the biggest buyer of US government assets, so illiquidity is working against you,” Williams told MarketWatch by phone. “But I think the higher bond rates rise, the sooner we get into a recession era, and the sooner the 10-year Treasury will pivot. So maybe we need more short-term pain, which will be better in the long run.”

As stocks tumbled, the CBOE Volatility Index, a measure of expected S&P 500 volatility known as Wall Street’s “fear gauge,” hovered around 28, near its highest level since late June and well above the long-term average of 20 but still shy of the levels that have generally signaled capitulation.

Evercore ISI on Wednesday lowered its year-end S&P 500 target to 3,975 from 4,200 and expects a “full retest” of the June low in the coming weeks to reflect a growing likelihood of a recession.

See also: The Fed will tolerate a recession and 5 other things we learned from Powell

U.S. investors digested a few economic data reports early Thursday, including the latest jobless claims reading, which showed new jobless claims rose slightly to 213,000 last week. However, the US labor market remains robust. The data showed that the current account deficit for the second quarter narrowed compared to the same period last year, likely due to the impact of the stronger dollar.

See: Unemployment claims hit 213,000 but still show strong job market and few layoffs

Outside the US, the trend of monetary policy tightening among developed countries continued on Thursday, with one notable exception. Norway’s central bank raised borrowing costs by 50 basis points to 2.25% and the Swiss National Bank by 75 basis points to 0.5%. The Bank of England also raised rates by half a percentage point.

But the Bank of Japan left policy unchanged, leaving overnight rates at minus 0.1%, as it argued that inflation of 2.8% mainly reflects soaring commodity prices.

The BoJ intervened quickly in the currency market, pushing the dollar lower, a trend also reflected in the euro and the pound. The ICE U.S. dollar index, an indicator of dollar strength against a basket of rivals, rose above 111 for the first time since 2002.

See: A sharp sell-off in short-term debt pushes rates close to the ‘magic’ level that ‘scares’ markets

Actions in the spotlight

— Jamie Chisholm contributed to this article.

-Isabel Wang

 

(END) Dow Jones Newswire

09-22-22 1448ET

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