US equity indexes slumped while Fed officials discussed the size of interest rate hikes needed to quell inflation. Traders have fully priced in quarter-point interest rate increases at the Federal Reserve’s next two meetings while 50 basis-point hikes are not out of the question.
(Bloomberg) — US equity indexes slumped while Fed officials discussed the size of interest rate hikes needed to quell inflation. Traders have fully priced in quarter-point interest rate increases at the Federal Reserve’s next two meetings while 50 basis-point hikes are not out of the question.
Both the S&P 500 Index and Nasdaq 100 are heading for their second-straight weekly loss. Benchmark Treasury yields dipped, reversing an early climb.
Federal Reserve Bank of Richmond President Thomas Barkin said he favors a quarter-point interest rate hike in February in the central bank’s quest to tamp down inflation. His comments come as Fed Governor Michelle Bowman said the Fed should keep raising rates to cool inflation which remains “much too high.”
Earlier this week two of the Fed’s most hawkish officials, Loretta Mester and James Bullard, spoke out in favor of larger rate hikes.
“If investors are really finally starting to believe the Fed about their claim that rates will stay ‘higher for longer,’” Matt Maley, chief market strategist at Miller Tabak + Co., wrote, “we could be looking at a significant decline in the weeks ahead. With the stock market as expensive as it is, a shift in thinking by investors about the issues of interest rates and liquidity is a dangerous combination.”
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 to nearly 5.3% in July, according to trading in the US money markets. That compares with a perceived peak rate of 4.9% just two weeks ago.
“The Fed talking tough – and raising the possibility of going back to 50 bps rate hikes – is pouring cold water on the rally,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “The Fed now becoming more hawkish could be the last straw for dip buyers.”
European stocks slumped and rates-sensitive technology stocks were among the biggest decliners as money market traders priced in 3.75% for the ECB’s deposit rate by October, up from 3.4% following the bank’s last meeting this month.
On the outlook for US equities, Bank of America Corp. strategists wrote that the delayed arrival of a recession will weigh on stocks in the second half of the year, noting that a resilient economy thus far means interest rates will stay higher for longer.
A BofA team led by Michael Hartnett is among those predicting a scenario known as “no landing” in the first half, where economic growth will stay robust and central banks will likely remain hawkish for longer. That will probably be followed by a “hard landing” in the latter part of 2023, they wrote.
Bitcoin retreated following three days of gains after the US Securities & Exchange Commission accused Do Kwon and Terraform Labs Pte of fraud over the wipeout of digital currencies he created.
In commodities, oil headed for a weekly drop as rising US inventories and the prospect of further tightening by the Federal Reserve eclipsed the lift from more signs that Chinese energy demand is improving.
Stocks
- The S&P 500 fell 0.9% as of 11:19 a.m. New York time
- The Nasdaq 100 fell 1.3%
- The Dow Jones Industrial Average fell 0.2%
- The Stoxx Europe 600 fell 0.2%
- The MSCI World index fell 0.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro was little changed at $1.0664
- The British pound was little changed at $1.2004
- The Japanese yen fell 0.3% to 134.31 per dollar
Cryptocurrencies
- Bitcoin fell 1.5% to $24,169.38
- Ether fell 0.5% to $1,673.79
Bonds
- The yield on 10-year Treasuries was little changed at 3.86%
- Germany’s 10-year yield declined two basis points to 2.46%
- Britain’s 10-year yield advanced four basis points to 3.54%
Commodities
- West Texas Intermediate crude fell 2.6% to $76.45 a barrel
- Gold futures fell 0.3% to $1,847.10 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Tassia Sipahutar and John Viljoen.
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