US stocks and bonds dropped as investors adjusted their outlook on peak rates after a slew of data highlighted persistent inflationary pressures and Federal Reserve officials continued to be hawkish.
(Bloomberg) — US stocks and bonds dropped as investors adjusted their outlook on peak rates after a slew of data highlighted persistent inflationary pressures and Federal Reserve officials continued to be hawkish.
The S&P 500 and the Nasdaq 100 fell after a gauge of manufacturing improved for the first time in six months. Investors balked as prices-paid measures also rose. Technology companies, which are typically sensitive to rising interest rates, dragged the S&P 500 lower. Energy remained the index’s best performer on Wednesday.
Treasury yields stayed higher, with the 10-year rate piercing the closely watched 4% level. Fed swaps are now pricing in a peak policy rate of 5.5% in September, with some betting that the benchmark interest rate could reach 6%. A dollar index dropped.
Investors remained cautious after Fed officials reinforced their hawkish stance on Wednesday. Atlanta Fed’s Raphael Bostic called for continued rate hikes to above 5% to make sure inflation doesn’t pick up again. Minneapolis Fed President Neel Kashkari, meanwhile, said he’s concerned that there isn’t much of an indication that the central bank’s rate hikes are slowing down the services sector.
“The markets crossed the fine line between expectations and wishful thinking,” said Deborah Cunningham, senior portfolio manager at Federated Hermes. “But investors checked that fantasy within the shortest month of the year. Indeed, change can come quickly after acceptance.”
This year could prove to be challenging, according to George Patterson, chief investment officer at PGIM Quantitative Solutions.
“I see more risk to the downside in the US only because the US is firing on all cylinders, and my belief is they’re going to have to raise rates a bit more than people are expecting,” he said in an interview at Bloomberg’s New York headquarters.
While data showing China’s economy is on track for a stronger recovery had briefly buoyed US stock futures before markets opened, that bounce didn’t sustain during Wednesday’s trading session.
“This is a China story. This is not a global growth story,” Mike Wilson, chief US equity strategist at Morgan Stanley, told Bloomberg Television. “So yes, it’s very good for China equities and maybe some Asian economies that can, that can gear off of that. But not so much the US stock market, which isn’t that geared to China growth.”
Bonds in Europe also fell as evidence mounted that further tightening is needed to tamp down on inflation. The latest data showed an unexpected acceleration in German inflation in February, further complicating the European Central Bank’s task after overshoots this week in other parts of the continent. A 4% ECB terminal rate is also now fully priced with rates forecast to rise through February 2024.
Key events this week:
- Eurozone CPI, unemployment, Thursday
- US initial jobless claims, Thursday
- Eurozone S&P Global Eurozone Services PMI, PPI, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.6% as of 2:32 p.m. New York time
- The Nasdaq 100 fell 0.9%
- The Dow Jones Industrial Average fell 0.3%
- The MSCI World index fell 0.3%
Currencies
- The Bloomberg Dollar Spot Index fell 0.4%
- The euro rose 0.7% to $1.0648
- The British pound fell 0.2% to $1.1999
- The Japanese yen was little changed at 136.23 per dollar
Cryptocurrencies
- Bitcoin rose 2.2% to $23,652.23
- Ether rose 2.9% to $1,652.89
Bonds
- The yield on 10-year Treasuries advanced eight basis points to 4.00%
- Germany’s 10-year yield advanced six basis points to 2.71%
- Britain’s 10-year yield advanced one basis point to 3.84%
Commodities
- West Texas Intermediate crude rose 0.6% to $77.54 a barrel
- Gold futures rose 0.4% to $1,844.80 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Isabelle Lee and Alice Atkins.
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