(Bloomberg) — U.S. stocks swung between gains and losses after the biggest rout since November as investors reassessed valuations amid the Federal Reserve’s latest signal that it will move aggressively to tamp down inflation.
The S&P 500 was little changed late-morning, attempting to rebound from a 1.9% drop sparked by Fed meeting minutes that suggested the central bank is ready to raise rates sooner and higher than previously expected. The hawkish stance hammered the riskiest of assets, from high-priced software stocks to newly-public companies with limited earnings track records. Treasuries continued a selloff, although the velocity of the downdraft eased with the 10-year rate near 1.74%.
The Fed’s overtly hawkish stance has roiled financial markets to start the year, with investors recalibrating how to price assets in an environment of expected high economic growth and rising interest rates. The removal of crisis-era accommodation marks a shift not seen in at least three years, a time that also saw a spike in volatility and ultimately a major stock rout. While rising rates makes capital more expensive and can threaten earnings power, they also come into an economy that continues to expand rapidly.
“We knew coming into 2022 that the Fed was going to be a creator of volatility within the market and we’re seeing that right out of the gate at the start of the year,” Lindsey Bell, chief markets and money strategist at Ally, said by phone. “The good news is that today things seem to be stabilizing a little bit after yesterday’s knee-jerk reaction.”
Nicholas Colas, co-founder of DataTrek Research, said his advice is to invest “very carefully” the next few days.
“Markets are concerned that we’ve never seen the Federal Reserve both lift interest rates off zero and reduce the size of its balance sheet at the same time. There was a two-year gap between those two events in the last cycle, so it is a valid concern,” Colas wrote. “We’re not predicting a meltdown, but we get why the market swooned.”
U.S. jobless claims figures ahead of Friday’s payrolls report did little to change the market mood. The claims rose to 207,000 last week, the release showed, but stayed within the range of forecasts by 30 economists.
“Inflation is center stage when it comes to the Fed’s potential moves. While hiring has certainly been a challenge, the employment picture has been improving and edging toward what it was pre-pandemic,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial. “With the labor market somewhat under control, jobless claims are likely going to fade into the background while the Fed is focused on their inflation mandate.”
Treasuries extended their losses, with the rates between the two-year and 10-year tenors adding at least three basis points each. Other government bonds also declined. German 10-year borrowing costs jumped to the highest since May 2019, while their Italian counterparts surged to a June 2020 high. Likewise, Japan’s benchmark yield climbed to the highest since April and the U.K.’s 10-year yield jumped to an October high.
In Europe, stocks fell, while in Hong Kong, the Hang Seng Tech Index pared back losses to trade higher.
Bitcoin tumbled to $42,900. Crude-oil futures extended gains. Gold fell.
What to watch this week:
Fed’s Daly discusses monetary policy on a panel Friday
ECB’s Schnabel speaks on a panel Saturday
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
The S&P 500 was little changed as of 11:40 a.m. New York time
The Nasdaq 100 rose 0.2%
The Dow Jones Industrial Average fell 0.3%
The Stoxx Europe 600 fell 1.3%
The MSCI World index fell 0.5%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.1% to $1.1302
The British pound fell 0.2% to $1.3536
The Japanese yen rose 0.3% to 115.78 per dollar
Bonds
The yield on 10-year Treasuries advanced three basis points to 1.74%
Germany’s 10-year yield advanced two basis points to -0.07%
Britain’s 10-year yield advanced six basis points to 1.15%
Commodities
West Texas Intermediate crude rose 2.5% to $79.79 a barrel
Gold futures fell 1.9% to $1,790.20 an ounce
