(Bloomberg) — Stocks erased gains and bond yields spiked after Jerome Powell signaled the Federal Reserve will steadily unwind its pandemic-era stimulus as it fights elevated inflation.
The S&P 500 posted a back-to-back drop after rallying more than 2% earlier in the day. Meantime, the dollar climbed to a one-month high and 10-year Treasury yields approached 1.9%. In late trading, an $183 billion exchange-traded fund tracking the Nasdaq 100 whipsawed after Tesla Inc. said supply-chain troubles will limit production into 2022, while Intel Corp. gave a disappointing profit forecast.
Powell said the central bank was ready to raise rates in March and didn’t rule out moving at every meeting to tackle the highest inflation in a generation. In a separate statement, the Fed said it expects the process of balance-sheet reduction will commence after it has begun hiking. A rate increase would be the central bank’s first since 2018, with many analysts forecasting a quarter-point hike in March to be followed by three more this year and additional moves beyond.
Swaps traders are now pricing in around 30 basis points of tightening at the next central bank gathering in March. The Fed typically moves rates in increments of 25 basis points, so that kind of pricing suggests that at least a standard hike is certain and there’s around a one-in-five possibility of a 50 basis point increase. Around 1.13 percentage points of tightening are priced in for the whole of 2022.
Comments:
- “After hearing Fed Chair Powell talk, it became clear the risk of more rate hikes was elevated, and the earlier Wall Street rally fizzled,” wrote Edward Moya, senior market analyst at Oanda.
- “Not surprisingly, markets took these comments as a signal that tighter policy was coming, and we’ve seen a predictable response,” wrote Matt Weller, global head of research at Forex.com, referring to Powell’s remarks.
- “The stock market is especially vulnerable to higher rates and the removal of the tailwind that the Fed’s asset purchases have provided for the past two years,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “We believe the economy will stay out of recession and the bull market in stocks will continue this year, but we are concerned that the volatility we have already witnessed this month will increase in the months ahead.”
Corporate highlights:
- Microsoft Corp. said its cloud-computing business has potential to drive growth, while Texas Instruments Inc.’s upbeat outlook signaled demand for electronic components remains high.
- Planemaker Boeing Co. recorded $5.5 billion in total charges and costs to cover higher factory and customer expenses for the 787 Dreamliner.
- AT&T Inc. posted earnings that topped estimates, giving investors less reason to fret over lavish free-phone promotions.
- Nasdaq Inc., operator of the technology-heavy stock exchange, posted record revenue that beat analysts’ expectations.
- Mattel Inc. won back the license to produce toys based on Walt Disney Co.’s princesses and the “Frozen” movies.
Read: Hedge Funds Face New SEC Disclosures as Gensler Cracks Down
The latest economic readings showed that sales of new U.S. homes climbed in December to a nine-month high. Meantime, the merchandise-trade deficit unexpectedly widened to a fresh record as imports continued to rise, outpacing shipments overseas.
On the geopolitical front, the U.S. delivered a written response to Russia on the crisis in Ukraine, with Secretary of State Antony Blinken saying it sets out “a serious diplomatic path forward” even though it rejected some of the Kremlin’s key demands. The North Atlantic Treaty Organization military alliance confirmed soon after that it provided its own document striking similar themes.
What to watch this week:
- South African Reserve Bank rate decision Thursday.
- U.S. initial jobless claims, durable goods, GDP Thursday.
- Euro zone economic confidence, consumer confidence Friday.
- U.S. consumer income, University of Michigan consumer sentiment Friday.
For more market analysis, read our MLIV blog.
Stocks
- The S&P 500 fell 0.1% as of 4 p.m. New York time
- The Nasdaq 100 rose 0.2%
- The Dow Jones Industrial Average fell 0.4%
- The MSCI World index was little changed
Currencies
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.6% to $1.1238
- The British pound fell 0.3% to $1.3458
- The Japanese yen fell 0.7% to 114.63 per dollar
Bonds
- The yield on 10-year Treasuries advanced 10 basis points to 1.87%
- Germany’s 10-year yield was little changed at -0.07%
- Britain’s 10-year yield advanced three basis points to 1.20%
Commodities
- West Texas Intermediate crude rose 1.7% to $87.06 a barrel
- Gold futures fell 1.9% to $1,819.50 an ounce
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