U.S. stocks on Wednesday remained down, but off session lows, after the release of minutes from the Federal Reserve’s latest policy meeting last month underscored an emerging debate at the central bank over inflation risks.
Also Wednesday, the European Central Bank joined the chorus of global central banks warning about potential bubbles in financial assets due to massive government support programs designed to offset the economic shocks of the pandemic.
How are stock benchmarks performing?
- The Dow Jones Industrial Average DJIA,
-0.79% fell about 247 points to reach 33,795, a decline of 0.8%, which wiped out the blue-chip index’s gains for May. - The S&P 500 index SPX,
-0.63% shed 17 points, or 0.4%, to trade at 4,110. It had touched an intraday low at 4,061.41. - The Nasdaq Composite Index COMP,
-0.43% retreated 11 points to about 13,288, a drop of 0.1%, well off its Wednesday low at 13,072.23.
On Tuesday, the Dow fell by 267.13 points, or 0.8%, to close at 34,060.66, the S&P 500 finished with a loss of 35.46 points, or 0.9%, at 4,127.83, and the Nasdaq Composite slipped 75.41 points, or 0.6%, to finish at 13,303.64.
What’s driving the market?
Stocks remained on pace for a third day of losses after the release of Fed meeting minutes showed debate emerging within the central bank over whether rising inflation will be more than “transitory” as the central bank keeps monetary policy accommodative in the wake of the pandemic.
Minutes of the rate-setting Federal Open Market Committee’s last meeting also showed the possibility of discussions around when to taper the Fed’s near $120 billion asset purchases, particularly if the economy continues to make rapid progress as COVID-19 cases decline and more of the U.S. population gets vaccinated.
Back in late April, the FOMC voted unanimously to maintain accommodative policies, aimed at holding down short-term borrowing costs between 0% and 0.25%, while maintaining its pace of monthly asset purchases. At the time, Fed Chairman Jerome Powell described the economic recovery from the COVID pandemic as uneven and incomplete.
“The economic re-opening is creating supply side frictions that should abate as labor supply improves and supply chains respond, but that may take a couple of quarters to achieve,” said Bob Miller, BlackRock’s head of Americas fundamental fixed income, in written comments that followed the Fed minutes.
“It’s unclear to us how maintaining the emergency monetary policy settings from one year ago will help improvement on these two fronts, although we did not expect to receive much additional guidance in today’s minutes.”
Market participants have struggled with the concept of “transitory” inflation pressures, as described by a number of Fed officials.
“Our view remains that tapering will be discussed around August/September this year, with a formal announcement in December that tapering will commence in 1Q22,” wrote analysts at UniCredit.
Some market participants and analysts fear that after years of not achieving the Fed’s 2% annual inflation target, one that the central bank has said it is now willing to overshoot to achieve, that a double-digit rise in inflation à la the 1960s may be brewing, Bloomberg News reported on Wednesday.
Investors also digested a new ECB report warning about potential “abrupt asset price corrections,” after the recent rally in financial assets and awaited an account of the Fed’s most recent policy meeting in April.
“You have a third central bank to come out and question valuations,” said Larry Adam, chief investment officer at Raymond James, pointing to recent comments by the Fed and ECB on potentially sharp asset price declines following significant rallies, as well as remarks from the Bank of China about “unreasonable” increases in commodity prices.
“When you start to combine that,” Adam said, investors have responded by saying: “Let’s focus on fundamentals,” particularly when it comes to high growth technology companies that have yet to turn a profit.
A sharp selloff across crypto assets was also attracting attention on Wednesday. Bitcoin BTCUSD traded near $40,000 on Wednesday, recovering a chunk of early losses after dipping to a low around $30,000, and market strategists said that the downturn in crypto may also reflect weakening bullish sentiment for speculative assets.
Read: What crypto analysts say investors should do as bitcoin market hit by ‘extreme fear’
On the public health front, India recorded a global record of 4,529 deaths from COVID-19 in a single day on Tuesday, according to its official numbers. The previous record was the 4,468 deaths counted in the U.S. in January. Brazil is third in cases with 15.7 million and second in deaths with 439,050.
Which companies are in focus?
- Advanced Micro Devices Inc. AMD,
+1.57% shares were up 2.6%, after its board approved a $4 billion share repurchase program. - Squarespace Inc. SQSP,
-12.04% shares were about 9.5% lower Wednesday, following its direct listing Wednesday on the New York Stock Exchange under the ticker SQSP. - Lowe’s Cos. LOW reported Wednesday fiscal first-quarter profit, sales and same-store sales that rose above expectations, and provided an upbeat outlook. Shares were off nearly 1.4%.
- Target Corp. TGT,
+5.42% reported net income totaled $2.097 billion, or $4.17 per share, up from $284.0 million, or 56 cents per share, last year. Adjusted EPS of $3.69 was 525% higher than last year, reaching an all-time high. Its stock was up 5.6%. - Southwest Airlines Co. LUV shares were down 2.8% after it disclosed Wednesday that April operating revenue and load factor were in line with expectations, and said it continues to see improvement in leisure passenger demand and bookings for May and June travel.
- Purple Innovation Inc. shares PRPL,
-4.21% tumbled over 5.5% after the mattress and sleep products company priced a secondary offering of 7.3 million shares at $30 each, a discount over its closing price of $32.50 on Tuesday.
How are other assets faring?
- The yield on the 10-year Treasury note TMUBMUSD10Y was up 4 basis points to 1.68%. Yields and bond prices move in opposite directions.
- The ICE U.S. Dollar Index DXY, a measure of the U.S. currency against a basket of six major rivals, was up 0.5%, trying to climb off its lowest level since late February.
- West Texas Intermediate crude for June delivery CL.1,
-3.19% CLM21,-3.19% fell $2.12, or 3.2%, to $63.36 a barrel on the New York Mercantile. - June gold futures GCM21,
+0.04% rose $3.70, or 0.2%, to $1,871 an ounce, extending a climb for the most-active contract, which finished at its highest since Jan. 7 on Tuesday, FactSet data show. - The Stoxx Europe 600 index SXXP declined 1.5%, while London’s FTSE 100 UKX fell 1.2%.
- In Asian trade, Japan’s Nikkei 225 NIK,
-1.28% lost 1.3% and the Shanghai Composite SHCOMP,-0.51% edged down 0.5%.
