"With inflation still far from the Fed's 2% target, and the economy retaining much of its vigor, money market participants have been revising upwards where they see the Fed fund rates peaking - currently at 5.35% in July and staying near those levels throughout the year.
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"Today, the realization is that the Fed is not kidding around about higher for longer, and in fact it might be a little bit higher for a little-to-a-lot bit longer," said Carol Schleif, chief investment officer at BMO Family Office.
U.S. stocks had an upbeat start to the year after their worst annual showing in more than a decade in 2022, as investors hoped the central bank's rate-hike cycle was nearing its end. Such positivity makes equity markets susceptible to pull-backs though, when data undermines such expectations.
"The market keeps looking for a dovish pivot, and they are just not going to get it," said Schleif.
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Posted: 4 hours ago
US stocks record worst day in two months on rate rise worries
"US stocks recorded their worst day in two months on Tuesday, as investors were unnerved by economic data suggesting interest rates have further to rise after months of increases by the Federal Reserve.
The blue-chip S&P 500 index ended down 2 per cent, with declines in every sector. The tech-heavy Nasdaq Composite slid 2.5 per cent. Both indices had their steepest daily losses since December 15.
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The Vix index, a measure of stock market volatility and often dubbed Wall Street’s “fear gauge”, rose above 23, its second highest level of the year.
Markets have wobbled in recent days as investors gird for further interest rate rises from the Fed to combat inflation in the US economy. Yields on benchmark Treasury bonds reached three-month highs on Tuesday.
“The reason for the sell-off in the stock market is a reassessment of the [US Federal Reserve’s] path and the stark rise in Treasury rates,” said Lou Brien, strategist at DRW Trading. “The move higher in Treasury yields reinforces the Fed being tighter for longer.”
✓ Benchmark 10-year Treasuries slid, pushing yields up to 3.95 per cent — their highest since early November. Interest rate-sensitive two-year notes yielded 4.73 per cent, approaching levels last hit in November, which were the highest since 2007.
✓ S&P Global’s US composite purchasing managers’ index registered a reading of 50.2, an eight-month high that beat market expectations of 47.5, according to data released on Tuesday. That was mirrored by other bullish readings in the eurozone earlier in the day. A level above 50 indicates industry growth.
The data followed strong US payrolls and retail sales figures in recent weeks.
“Expectations of rate cuts later in the year were never very realistic,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “There was an assumption that tightening would start to limit growth, and now people seem to have flipped from expecting a recession to a boom in a short period of time, based on a few releases which, granted, all say the same thing.”
In Europe, the benchmark Stoxx 600 closed down 0.2 per cent and Germany’s Dax shed 0.5 per cent after the S&P surveys for the eurozone also indicated private sector activity in the bloc was better than expected.
Investors were now more focused on interest rates than the prospect of stronger profits because of robust economic activity, said Neil Birrell, chief investment officer at asset manager Premier Miton. “People thought the end was in sight and there was some certainty, but every time we get a number like [the European PMI] it worries investors.”
Olli Rehn, a governing council member of the European Central Bank, on Monday said rates would peak during the summer, but that inflation was “excessively high”.
“With inflation so high, further rate hikes beyond March seem likely, logical and appropriate . . . I assume that we will reach the ‘terminal rate’ in the course of the summer,,” he said.
✓ The yield on the 10-year German Bund rose as much as 0.01 percentage points to 2.56 per cent, closing at its highest point since the eurozone debt crisis in the summer of 2011.
Brent crude settled 1.2 per cent lower to $83.05 a barrel, while the US equivalent WTI lost 0.2 per cent to $76.16, with both benchmarks falling further after making slight losses last week.
✓ In
Asia, the Hang Seng index fell 1.7 per cent, while China’s CSI 300
gained 0.3 per cent after rising 2.45 per cent on Monday, its best
one-day performance since late November. The index has risen 6.6 per
cent this year."
Additional reporting by Jennifer Hughes in New York
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NEW YORK -- Wall Street's major averages fell sharply on Tuesday as investors fretted over the prospects of higher interest rates.
The Dow Jones Industrial Average plunged 697.10 points, or 2.06 percent, to 33,129.59. The S&P 500 sank 81.75 points, or 2 percent, to 3,997.34. The Nasdaq Composite Index shed 294.97 points, or 2.5 percent, to 11,492.3.
The three major indexes booked their worst daily percentage declines since Dec. 15, according to FactSet data.
All the 11 primary S&P 500 sectors ended in red, with consumer discretionary and technology down 3.34 percent and 2.4 percent, respectively, leading the slide.
The Cboe Volatility Index, widely considered as the best fear gauge in the stock market, surged 7.72 percent to 22.87.
The market sell-off came as latest US economic data fueled worries that interest rates will need to stay higher for longer to tame inflation.
A survey released Tuesday by S&P Global showed that flash US manufacturing PMI (Purchasing Managers' Index) rose to 47.8 in February from the prior month's reading of 46.9.
The S&P Global flash US services business activity index posted 50.5 in February, up from 46.8 in January, and signaled the first expansion in service sector output since June 2022.
Last week, the January US Consumer Price Index and Producer Price Index showed inflation inching higher, dashing hopes of an early end to rate hikes.
"Concerns that the Federal Reserve will need to hike rates further and hold them there for longer appeared prominent in investors' minds," UBS analysts said in a note on Tuesday.
The Fed has raised its policy rate by 450 basis points since last March from near zero to a range of 4.5-4.75 percent. Top Fed officials have stressed that more needs to be done to curb inflation.
St. Louis Fed President James Bullard said last week that he pushed for a higher interest rate increase at the last meeting and could see a more aggressive move ahead.
Cleveland Fed President Loretta Mester said she "saw a compelling economic case" for a 50 basis-point increase at the recent meeting, noting the US central bank has to be prepared to move higher if inflation remains stubbornly high.
Markets had been pricing in two 25 basis point interest rate hikes for this year, but recent data had investors to price in a potential third interest rate hike, according to strategists at LPL Financial Research.
"What has caught the market's attention, however, is the slight probability for a 50 basis point rate hike at the March meeting has been climbing higher," they said on Tuesday, adding that this week's release of the Fed's preferred inflation index, the Personal Consumption Expenditures Price Index, "will be especially important in forecasting the Fed's next policy decision."
The Fed on Wednesday is set to publish the minutes from its Jan 31-Feb 1 meeting.
US financial markets were closed on Monday due to the Presidents' Day holiday.
For the trading week ending Feb. 17, the Dow slipped 0.13 percent, the S&P 500 fell 0.28 percent, and the technology-heavy Nasdaq rose 0.59 percent.
Wall Street posts worst day of 2023 on higher-for-longer rate fears
- Summary
- Companies
- Biggest daily falls on Wall St since Dec. 15
- Home Depot falls as FY profit forecast disappoints
- Big tech stocks hit in widespread decline
- U.S. business activity expands for first time in 8 months
- Indexes down: Dow 2.06%, S&P 2%, Nasdaq 2.5%
Feb 21 (Reuters) - Wall Street posted its worst performance of the year on Tuesday, with the main benchmarks ending down as investors interpreted a rebound in U.S. business activity in February to mean interest rates will need to stay higher for longer to control inflation.
For the S&P 500 (.SPX) and Nasdaq Composite (.IXIC), it was their third session in a row closing lower, while the decline in the Dow Jones Industrial (.DJI) wiped out its gains for 2023.
The falls came after the S&P Global Purchasing Manufacturer's index, which reflects business activity in the United States, returned to expansion for the first time in eight months in February. The 50.2 reading, up from 46.8 in January, was buoyed by a robust services sector, according to a survey. . .
Investors will look to the minutes detailing discussion at the Fed's last policy meeting, due out on Wednesday, for further clues on attitudes within the central bank on rates.
The Dow Jones Industrial Average (.DJI) fell 697.1 points, or 2.06%, to 33,129.59, the S&P 500 (.SPX) lost 81.75 points, or 2.00%, to 3,997.34 and the Nasdaq Composite (.IXIC) dropped 294.97 points, or 2.5%, to 11,492.30.
Among those hit by Tuesday's widespread declines were big tech stocks, with Tesla Inc (TSLA.O), Amazon.com Inc (AMZN.O), Microsoft Corp (MSFT.O) and Google-parent Alphabet Inc (GOOGL.O) all falling between 2.1% and 5.3%.
Not helping them was the fact the U.S. benchmark 10-year Treasury notes hit a fresh three-month high.
Higher yields typically weigh on growth stocks, whose valuations tend to be based on future profits that are discounted heavily as rates go higher.
The semiconductor index (.SOX) was also impacted, dropping 3.3%.
Elsewhere, Home Depot Inc (HD.N) slumped 7.1% to a three-month low after the No. 1 domestic home improvement chain warned of weakening demand and issued a dour profit forecast for 2023.
Smaller rival Lowe's Cos Inc (LOW.N) fell 5.1% ahead of its results next week.
Walmart (WMT.N) forecast full-year earnings below estimates and painted a grim picture of hotter-than-expected food inflation squeezing profit margins. However, the world's largest retailer rose 0.6%.
All of the major 11 S&P 500 sectors fell, with the consumer discretionary index's (.SPLRCD) 3.3% decline leading the way.
Volume on U.S. exchanges was 11 billion shares, compared with the 11.62 billion average for the full session over the last 20 trading days.
The S&P 500 posted two new 52-week highs and one new low; the Nasdaq Composite recorded 57 new highs and 112 new lows."
Reporting by Johann M Cherian and Medha Singh in Bengaluru and David French in New York; Editing by Marguerita Choy and Anil D'Silva
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