Stocks slumped as investor debate shifts toward how long the Federal Reserve will keep interest rates elevated. US bonds gained as investors bought the dip.
(Bloomberg) — Stocks slumped as investor debate shifts toward how long the Federal Reserve will keep interest rates elevated. US bonds gained as investors bought the dip.
The S&P 500 fell 0.7% while the Nasdaq 100 slid 0.6% after US retail sales rose more than forecast, data that suggested the economy can support higher rates and may dissuade policy makers from pivoting to easier policy. Financials weighed on the broader benchmark after a warning from Fitch that the ratings firm may downgrade larger lenders like JPMorgan Chase & Co. or Bank of America Corp. while Discover Financial Services was the worst performer after its chief executive officer resigned.
In earnings, Home Depot Inc. beat the average analyst estimate, suggesting that US home improvement spending is performing slightly better than expected following an unprecedented boom during the pandemic. More insight into the state of the consumer will come later this week when Target Corp. and Walmart Inc. are set to report.
Investors are growing wary that consumer-facing companies will be able to maintain their pricing power for much longer as the lagged effects of the Fed’s policy tightening take hold.
“Eventually — and I think we’ll see some of that now — those margins get eaten away,” Bob Doll, chief investment officer at Crossmark Global Investments, told Bloomberg Television. “Because companies can only raise prices so far, and you’re already seeing consumers begin to make noise and balk and stop buying some things.”
“We’ve been — since the first of the year — saying recession starts sometime between Labor Day and the end of the year,” he added. Doll is sticking with that prediction though he expects it to be a mild downturn.
US Treasuries went higher as buyers stepped in amid a global bond selloff. Options traders have been recalibrating bets to accommodate the possibility that interest rates and inflation will stay high for longer. Yields on the 10-year reached 4.27%, the highest since October before reversing while the two-year dipped after moving above 5%.
Read more: Highest Treasury Yields in Months on Strong Data Lure Buyers
Investors are navigating a hawkish Federal Reserve, a China slowdown, and flare-ups across emerging markets, after a record first half in stock markets. A devaluation in Argentina and Russia’s emergency rate hike on Tuesday to stem the ruble’s slide added to the risk-off sentiment.
Read more: Losses Multiply in Emerging Markets Craving Big Bang Stimulus
Still, Bank of America Corp.’s latest global survey of fund managers found investors the least pessimistic on stocks since February of last year, before the Fed began one of the most aggressive tightening cycles in decades.
They increasingly expect no recession at all within the next 18 months, and a “soft landing” in the next 12 months remains the base case, BofA strategists led by Michael Hartnett wrote in a note.
In currencies, the British pound was the best performer in the Group of 10 as investors weighed the prospect of an outsized interest-rate hike after wage growth accelerated to the strongest pace on record.
The focus later this week will be on UK inflation data due Wednesday, followed by minutes from the Fed’s July policy meeting, as traders seek clues on central banks’ next moves.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.7% as of 11:51 a.m. New York time
- The Nasdaq 100 fell 0.6%
- The Dow Jones Industrial Average fell 0.7%
- The Stoxx Europe 600 fell 0.9%
- The MSCI World index fell 0.6%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.2% to $1.0930
- The British pound rose 0.4% to $1.2739
- The Japanese yen rose 0.1% to 145.39 per dollar
Cryptocurrencies
- Bitcoin fell 0.2% to $29,319.33
- Ether fell 0.2% to $1,838.69
Bonds
- The yield on 10-year Treasuries declined one basis point to 4.18%
- Germany’s 10-year yield advanced four basis points to 2.67%
- Britain’s 10-year yield advanced two basis points to 4.59%
Commodities
- West Texas Intermediate crude fell 2.4% to $80.56 a barrel
- Gold futures fell 0.2% to $1,939.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Cecile Gutscher, Sagarika Jaisinghani, Tassia Sipahutar, Michael Msika and Michael Mackenzie.
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