Stocks dropped, while Treasury 10-year yields rose alongside the dollar after a labor-market reading reinforced the case for the Federal Reserve’s higher-for-longer stance. Oil climbed.
(Bloomberg) — Stocks dropped, while Treasury 10-year yields rose alongside the dollar after a labor-market reading reinforced the case for the Federal Reserve’s higher-for-longer stance. Oil climbed.
The S&P 500 fell about 1%, toward its lowest since June. A gauge of homebuilders slid 4%. Cisco Systems Inc. slipped after agreeing to buy cybersecurity company Splunk Inc. in a $28 billion deal. Arm Holdings Plc briefly slid below its initial public offering price. Broadcom Inc. sank on a report that Alphabet Inc.’s Google is considering dropping the company as a supplier for artificial intelligence chips as soon as 2027. FedEx Corp., a proxy for global growth, rose after a bullish outlook.
Longer-dated Treasury yields climbed, with 10-year rates set for the highest since October 2007. Meantime, the two-year note yield fell. The differential between two- and 10-year yields — a proxy for confidence in the economic outlook — narrowed by more than 10 basis points to about 66 basis points.
The dollar rose against most of its developed-market peers. The yen outperformed, inching closer to the 150 level that some analysts consider to be a trigger for intervention. The pound fell after the Bank of England kept rates unchanged for the first time in almost two years. Germany’s benchmark yields hit a 12-year high.
“There’s a post-Fed hangover in the market this morning and dark clouds over Wall Street,” according to strategists at Bespoke Investment Group. “After the market followed the recent Fed-day script nearly step for step yesterday, international markets continued the downward trend overnight, and US markets are picking up right where they left off yesterday.”
To Matt Maley at Miller Tabak + Co., while the Fed signaled it will indeed keep rates higher for longer, the central bank “did seem to push that narrative to an even greater degree than expected” — by raising the growth outlook and where officials expect the Fed funds rate to be trading at future dates in a significant manner.
Applications for US unemployment benefits fell to the lowest level since January last week, indicating a healthy labor market that continues to support the economy. Initial jobless claims dropped to 201,000. The median estimate in a Bloomberg survey of economists called for 225,000 applications.
“On net, it was a solid read from one of the closest to ‘real time’ employment data investors are afforded,” said Ian Lyngen at BMO Capital Markets. “It also marginally increases the chances the Fed hikes in November and certainly reinforces the Fed’s messaging regarding avoiding cuts as long as possible in 2024.”
With most of the Fed board supporting an additional hike in 2023, lower-than-expected jobless claims is the type of data that could make that a reality, according to Mike Loewengart at Morgan Stanley Global Investment Office.
“The Fed has been waiting for the labor market to loosen up, and so far it hasn’t happened,” Loewengart added. “But even if they don’t hike again, continued strength in the jobs market will likely translate into rates remaining higher for longer.”
Bond-Market Pain
Bond traders are bracing for Treasury yields to keep pushing higher after the Fed signaled it’s likely to hold interest rates at lofty levels well into next year.
Fifty-eight percent of the 172 respondents in the Bloomberg Markets Live Pulse survey conducted after the Fed’s decision said that 2-year Treasury yields have yet to peak, while a plurality expect 10-year yields to climb over 4.5%. Two-year rates rose above 5.19% Thursday to a fresh 17-year high, while 30-year yields climbed to 4.48%, a level last seen in 2011.
Bond investors’ pain isn’t over yet, even though the Fed is done raising interest rates, said Bill Gross, the former chief investment officer of Pacific Investment Management Co.
In an investment outlook published Thursday, Gross said bond markets are headed for an unprecedented third year of losses, because of sticky inflation and widening deficits, a result of government fiscal spending he equates with throwing “money out of a helicopter.”
‘Skeptical’
Former Fed Bank of St. Louis President James Bullard said the central bank may need to raise rates further and hold them higher to guard against the risk of a reacceleration of inflation. Meantime, Former Treasury Secretary Lawrence Summers said policymakers are too optimistic with their latest set of economic projections, cautioning that they are at risk of being surprised by both faster inflation and weaker growth than they anticipate.
James Zelter, co-president of Apollo Global Management Inc., is “skeptical” the economy will achieve a soft landing, saying the effects of tighter monetary policy from central banks still haven’t been fully felt.
Elsewhere, oil resumed its breakneck rally after Russia banned gasoline and diesel exports, further tightening an already stressed global fuel market — and adding to concern about a flare-up in inflation.
Meantime, economic data also showed sales of previously owned US homes declined in August to the lowest since the start of the year, restrained by limited inventory and historically high mortgage rates. The combination of high financing costs, diminished inventory and elevated prices has created one of the least affordable housing markets on record.
Corporate Highlights
- Rupert Murdoch is stepping down as chairman of the boards of Fox Corp. and News Corp. following a nearly seven-decade career, and will become chairman emeritus of each company.
- Comcast Corp.’s NBCUniversal has reached a five-year deal to air WWE’s Friday Night SmackDown, taking over broadcast rights that have belonged to Fox Corp. since 2019.
- Darden Restaurants Inc. is seeing more “softness” among households with incomes above $125,000 compared to last year, Chief Executive Officer Rick Cardenas said.
- International Paper Co. climbed after Truist Securities upgrades the paper-products company to buy from hold, citing an improved outlook for the containerboard market.
Key events this week:
- China’s Bund Summit, Friday
- Japan CPI, PMIs, Friday
- Bank of Japan rate decision, Friday
- Eurozone S&P Global Eurozone PMIs, Friday
- US S&P Global Manufacturing PMI, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1.1% as of 11:13 a.m. New York time
- The Nasdaq 100 fell 1.2%
- The Dow Jones Industrial Average fell 0.6%
- The Stoxx Europe 600 fell 1.3%
- The MSCI World index fell 1.3%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0658
- The British pound fell 0.4% to $1.2296
- The Japanese yen rose 0.7% to 147.35 per dollar
Cryptocurrencies
- Bitcoin fell 1.8% to $26,597.44
- Ether fell 2.5% to $1,583.41
Bonds
- The yield on 10-year Treasuries advanced six basis points to 4.47%
- Germany’s 10-year yield advanced three basis points to 2.73%
- Britain’s 10-year yield advanced seven basis points to 4.28%
Commodities
- West Texas Intermediate crude rose 0.8% to $90.42 a barrel
- Gold futures fell 1.4% to $1,939.60 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee.
More stories like this are available on bloomberg.com
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