(Bloomberg) — The surge in stocks that followed the Federal Reserve decision proved short lived, with traders worried that officials could struggle to fight persistently high inflation amid the lingering threat of a recession.
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Just a day after notching its biggest rally in about two years, the S&P 500 headed toward its worst session since June 2020 — with 97% of its companies moving down. The technology-heavy Nasdaq 100 tumbled 5%. The dollar climbed. A selloff in long-end Treasuries pushed yields to multi-year highs, with the 10-year rate jumping above 3%.
The swing higher in long-dated yields matters for the broader economic picture as they influence borrowing costs for companies and home owners. Mortgage rates in the U.S. resumed their upward climb, reaching the highest level since August 2009. Data Thursday showed that productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labor costs surged and illustrated an extremely tight job market.
By pushing back on a jumbo-hike of 75 basis points in June, Fed Chair Jerome Powell beat back the market’s most-aggressive predictions for the path of interest rates on Wednesday. However, he may also have inadvertently set the stage for more turbulence going forward. It’s still a very rocky road ahead, with pivotal economic data and global developments due within days that could seed doubts about the central bank’s approach.
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“It’s going to be incredibly difficult for the Fed to normalize interest rates without having a negative impact on growth and earnings,” said Paul Nolte, portfolio manager at Kingsview Investment Management. “So stock prices are too high if we’re going to see a flattening or a decline in earnings per share.”
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“Make no mistake, the Fed is in the early stages of what we believe will be a very aggressive tightening cycle,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman.
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“We are obviously at the start of what will be an indeterminate string of hiking decisions,” wrote Michael Shaoul, chief executive officer at Marketfield Asset Management. “Although in theory this could be completed by economic data coming back into line with the FOMC’s comfort zone, history suggests that market turbulence will also have a part to play, and that once economic momentum does turn, stabilizing activity at a desirable level will prove to be extremely tricky.”
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“Investors have a ton to chew on, so while we may see some short-term volatility, keep in mind it’s natural to see ebbs and flows in the market as we enter a new era of monetary policy,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley.
Corporate Highlights:
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Shares of e-commerce companies from Etsy Inc. to Shopify Inc. tumbled after weaker-than-expected quarterly earnings and forecasts deepened concern that the pace of online shopping has slowed.
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EBay Inc. gave a lackluster sales and profit outlook for the current quarter, accelerating its decline from the peaks reached when shoppers were stuck at home during the pandemic.
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Elon Musk has secured about $7.1 billion of new financing commitments, including from billionaire Larry Ellison, a Saudi Prince, and Sequoia Capital, to help fund his proposed $44 billion takeover of Twitter Inc.
Elsewhere, the pound slumped as investors looked past the Bank of England’s rate increase and turned their focus on forecasts for a recession in 2023. BOE Governor Andrew Bailey said the U.K. economy is already slowing because of a squeeze on consumer spending power, and that will help reduce inflation next year.
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Key events this week:
Some of the main moves in markets:
Stocks
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The S&P 500 fell 3.8% as of 12:05 p.m. New York time
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The Nasdaq 100 fell 5%
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The Dow Jones Industrial Average fell 3.2%
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The Stoxx Europe 600 fell 0.7%
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The MSCI World index fell 2.9%
Currencies
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The Bloomberg Dollar Spot Index rose 1.2%
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The euro fell 1.1% to $1.0501
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The British pound fell 2.3% to $1.2337
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The Japanese yen fell 1% to 130.43 per dollar
Bonds
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The yield on 10-year Treasuries advanced 14 basis points to 3.07%
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Germany’s 10-year yield advanced seven basis points to 1.04%
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Britain’s 10-year yield was little changed at 1.96%
Commodities
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West Texas Intermediate crude fell 0.8% to $106.93 a barrel
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Gold futures rose 0.3% to $1,874.30 an ounce
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