Stocks were modestly lower on Friday as investors tried to determine the next step for the Federal Reserve amid the highest inflation in decades.
The tech-heavy Nasdaq Composite fell 0.6%, while the S&P 500 was down 0.2%. The Dow Jones Industrial Average held on to a meager gain.
Friday’s moves followed a sharp sell-off in bonds and stocks in the previous session. Treasury yields spiked in reaction to data that showed consumer prices surged more than 7% last month, the highest gain since February 1982.
The hotter-than-expected inflation reading prompted St. Louis Fed President James Bullard to call for accelerating rate hikes — a full percentage point increase by the start of July.
However, Fed officials contacted by CNBC’s Steve Liesman said that they don’t expect a 50-basis-point move would be appropriate. A basis point is equal to 0.01%, and the Fed typically moves in 25-basis-point increments. The presidents of the Atlanta, Richmond and San Francisco Feds pushed back against the idea of a double hike.
Futures market repriced rate-hike odds as CME data pointed to a 66% chance of a 50-basis-point increase at the March meeting, showing that traders were less confident in a larger hike than they were on Thursday afternoon.
“The Fed has a Goldilocks and Three Bears Problem, since moving quickly and persistently off of policy that is too easy clearly needs to happen,” Rick Rieder, BlackRock’s chief investment officer of global fixed income, said in a note.
“While the time has come (or did months ago) to move policy persistently and aggressively away from overly accommodative conditions, and toward a more neutral and appropriate stance, executing on this pivot is going to be a real challenge for policymakers,” Rieder said.
Goldman Sachs shifted its expectations for the Fed this year, calling for seven rate hikes in an effort to cool an economy that has generated inflation far more persistent than policymakers had anticipated.
The 10-year Treasury yield on Thursday jumped above 2% for the first time since 2019, while the rate-sensitive 2-year yield soared more than 26 basis points at one point in its biggest intraday move since 2009. The 10-year held above 2% on Friday, pushing slightly higher in midday trading.
Semiconductor stocks, which have been volatile in part due to supply chain issues caused by Covid, were underperformers on Friday. Shares of Advanced Micro Devices and Xilinx dipped more than 4%.
In earnings news, shares of Newell Brands jumped 8.8% after the company beat estimates on the top and bottom lines for the fourth quarter. Shares of Under Armour dropped 9.9% after the apparel company highlighted supply chain issues in its quarterly report.
Shares of Zillow rallied strongly, rising 11% the day after the real estate website operator posted a surprise profit of $1.07 against an expected loss of 42 cents per share. Travel stock Expedia rose 4% after the company beat earnings expectations and said that bookings were improving as the omicron variant wave fades.
“This is not a growth scare. I think if you see things like banks and airlines and cruise lines and energy and materials doing well, that’s a pretty good sign,” Phil Camporeale, J.P. Morgan Asset Management portfolio manager, said on “Squawk on the Street”
Despite a slide on Thursday that saw the Dow shed more than 500 points, the major averages are on pace to post their third positive week in a row with modest gains.
“The S&P 500 still trades at 20.0x on [forward price-to-earnings], the lowest level since COVID, but well above the 14-18x range during the prior Fed hiking cycle in 2015-19 and 28% above the historical average of 15.6x. We are not outright bearish given still healthy fundamentals, but we expect the market to remain volatile throughout the year, with so far no signs of inflation easing,” Bank of America’s Savita Subramanian said in a note to clients.
On the economic front, the University of Michigan’s preliminary consumer sentiment reading for February came in at 61.7, falling from 67.2 the previous month and missing expectations.
