Stocks Sink as Fed Officials Embrace Bigger Hikes: Markets Wrap

(Bloomberg) — US equity indexes closed firmly in the red Thursday after two Federal Reserve officials said they were considering 50 basis-point interest rate hikes to battle persistently high inflation.

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The S&P 500 Index fell 1.4% and the Nasdaq 100 sank 1.9%. Yield on the benchmark 10-year Treasury surged past 3.8% to the highest level this year.

Federal Reserve Bank of Cleveland President Loretta Mester said she had seen a “compelling economic case” for rolling out another 50 basis-point hike, and St. Louis President James Bullard said he would not rule out supporting a half-percentage-point increase at the Fed’s March meeting, rather than a quarter point.

Their warnings came after US producer prices rebounded in January by the most since June. New home construction retreated for a fifth month in January as elevated mortgage rates continue to keep a lid on housing demand. Weekly jobless claims fell to 194,000, below expectations of 200,000.

“You will not sustainably get to 2% inflation when you have a labor market that is this tight,” Steve Chiavarone, senior portfolio manager and head of multi-asset solutions at Federated Hermes, said by phone. “It is so completely out of whack.”

“The data that’s been coming in I think is confusing a lot of investors and confusing the market overall,” Kristen Bitterly, head of North America investments at Citi Global Wealth, said in an interview. “We believe that the rally that we’ve seen is actually a very technically driven rally. It’s not one that is based on fundamentals, which is why we’re not buying in at these levels.”

“Overall, layoffs remain low, suggesting companies remain reluctant to reduce their workforce for now,” wrote Rubeela Farooqi, chief US economist at High Frequency Economics. “A rapid rise in interest rates has yet to impact the labor market. But an adjustment is likely over coming months as the cumulative and lagged effects of restrictive monetary policy spread more broadly through the economy.”

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Thursday’s economic prints added further details for Fed policymakers plotting the path for rate hikes, after Wednesday’s US retail sales in January jumped by the most in almost two years.

Investors have been upping their bets on how far the Fed will raise rates this tightening cycle. They now see the federal funds rate climbing past 5.2% in July, according to trading in the US money markets. That compares with a perceived peak rate of 4.9% just two weeks ago, and the central bank’s current 4.5% to 4.75% target range.

The Dow Jones Industrial Average dropped 1.3%. So far this year the 30-member blue-chip gauge is up about 2%, compared with a roughly 7% gain in the S&P 500. The 5 percentage-point gap between the two makes the Dow’s start to a year the weakest relative to the S&P 500 since 1934, data compiled by Bloomberg show.

Bitcoin optimism continued as the cryptocurrency briefly topped $25,000 for the first time since August as traders’ fears of a US regulatory crackdown abated.

Oil futures fell as investors weighed evidence of higher energy demand in China against a large increase in US crude stockpiles. Gold was steady.

Key events:

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.4%, more than any closing loss since Jan. 18 as of 4 p.m. New York time

• 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 was little changed

Currencies

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

• The euro fell 0.1% to $1.0675

• The British pound fell 0.3% to $1.1993

• The Japanese yen surged 0.2%, more than any closing gain since Feb. 7

Cryptocurrencies

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.85%

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

• Britain’s 10-year yield advanced one basis point to 3.50%

Commodities

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Elena Popina, Cristin Flanagan and Angel Adegbesan.

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