(Bloomberg) — US stocks dropped and Treasuries sank after Federal Reserve officials signaled the central bank is still intent on raising rates until inflation is under control.
The S&P 500 swung between gains and losses as Nancy Pelosi’s arrival in Taiwan prompted China to announce missile tests, even as she said her visit did not alter longstanding US policy in the region.
US Treasury yields rose across the curve, with 10-year rates climbing as much as 17 basis points to 2.74% and the benchmark three-year rate surging more than 20 basis points, pushing it above 3%. The yen, which was on track for its fifth daily gain, fell as the dollar snapped four days of losses amid a sudden turnaround in risk sentiment.
Stocks started August on the back foot after posting their best month since 2020 in July. Investors have been keeping an eye out for hawkish comments from Fed officials about the need for higher rates to restrain elevated inflation. While San Francisco Fed President Mary Daly said on Tuesday that the Fed is “nowhere near” done with its efforts to tamp down on inflation, Chicago Fed President Charles Evans said he expects the pace of rate hikes will start to slow later in the year.
“The Fed is not likely to announce they’re letting up on the brakes at this point,” said Ellen Gaske, economist at PGIM Fixed Income. “They are still seeing inflation numbers that have not started to recede.”
Corporate earnings continued to roll in, impacting stocks. Caterpillar Inc. slumped after a slowdown in China weakened its business. That weighed on the Dow Jones Industrial Average, which was lower for the day. Shares of Uber Technologies Inc. soared as much as 18% after the firm reported second-quarter revenue that beat the average analyst estimate.
Fresh economic data has also kept investors on their toes. Recent data showed that US job openings in June fell to a nine-month low, a sign of moderating demand for labor as economic pressures mount. The job market has been a bright spot in an economy otherwise losing momentum and possibly heading toward a recession.
Goldman Sachs Group Inc. strategists led by Cecilia Mariotti said it was too soon for stock markets to fade the risks of a recession on expectations of a pivot in the Fed’s hawkish policy. JPMorgan Chase & Co. strategists, on the other hand, said the outlook for US stocks is improving for the second half of the year on attractive valuations.
Pelosi’s trip has created a fresh pressure point for investors already dealing with the prospects of a US recession, worldwide rate hikes and inflation that risks becoming entrenched as Russia’s war in Ukraine exacerbates food shortages.
“The Taiwan story fits into the broader risk-off theme,” said Mark McCormick, global head of FX strategy at TD Securities. “It raises concerns about global growth issues, especially if geopolitical tensions and knock-effects exacerbate inflationary concerns. In turn, that forces central banks to keep fighting inflation in spite of the clear deceleration of global growth.”
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What to watch this week:
- St. Louis Fed President James Bullard is due to speak, Tuesday
- OPEC+ meeting on output, Wednesday
- US factory orders, durable goods, ISM services, Wednesday
- BOE rate decision, Thursday
- US initial jobless claims, trade, Thursday
- Cleveland Fed President Loretta Mester due to speak, Thursday
- US employment report for July, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.1% as of 2:37 p.m. New York time
- The Nasdaq 100 rose 0.2%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World index rose 0.1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.6%
- The euro fell 0.7% to $1.0189
- The British pound fell 0.5% to $1.2190
- The Japanese yen fell 0.9% to 132.81 per dollar
Bonds
- The yield on 10-year Treasuries advanced 16 basis points to 2.74%
- Germany’s 10-year yield advanced four basis points to 0.82%
- Britain’s 10-year yield advanced six basis points to 1.87%
Commodities
- West Texas Intermediate crude rose 0.4% to $94.31 a barrel
- Gold futures fell 0.2% to $1,783.40 an ounce
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