US equity indexes pared losses as Federal Reserve officials debated the pace of tightening needed to bring inflation back to their 2% target. Traders fully priced in quarter-point interest rate increases at the Fed’s next two meetings after policymakers said Thursday that bigger hikes are not out of the question.
(Bloomberg) — US equity indexes pared losses as Federal Reserve officials debated the pace of tightening needed to bring inflation back to their 2% target. Traders fully priced in quarter-point interest rate increases at the Fed’s next two meetings after policymakers said Thursday that bigger hikes are not out of the question.
The S&P 500 Index dropped 0.5% heading toward a second straight weekly decline. Benchmark Treasury yields dipped, reversing an early climb.
Federal Reserve Bank of Richmond President Thomas Barkin said Friday that he favored a quarter-point interest rate hike in February to give the central bank “flexibility” in its quest to tamp down inflation. Fed Governor Michelle Bowman said rates need to keep going higher since inflation remains “much too high.”
On Thursday, two of the Fed’s most hawkish officials, Loretta Mester and James Bullard, spoke out in favor of 50 basis-point hikes.
“If investors are really finally starting to believe the Fed about their claim that rates will stay ‘higher for longer,’” Matt Maley, chief market strategist at Miller Tabak + Co., wrote, “we could be looking at a significant decline in the weeks ahead. With the stock market as expensive as it is, a shift in thinking by investors about the issues of interest rates and liquidity is a dangerous combination.”
Investors have been upping bets on how far the Fed will raise rates this tightening cycle. They now see the federal funds rate climbing to nearly 5.3% in July, according to trading in the US money markets. That compares with a perceived peak rate of 4.9% at the beginning of the month.
“The Fed talking tough — and raising the possibility of going back to 50 bps rate hikes — is pouring cold water on the rally,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “The Fed now becoming more hawkish could be the last straw for dip buyers.”
Friday’s index trading volumes remained somewhat below their 30-day averages during February’s options expiry, though the day’s sharp moves could be reflecting the growth of fast-twitch options.
Rad more: Wall Street Set for Calm Options Event as Short-Term Bets Boom
“Markets are acting weird,” said Cliff Hodge, chief investment officer for Cornerstone Wealth. “The narrative for bulls has changed from soft-landing to strong economy. What this ignores is that strong economy means a more aggressive Fed, which means higher rates and stronger dollar. Neither of these support current valuations. Bulls could be on borrowed time.”
Bank of America Corp. strategists wrote that the delayed arrival of a recession will weigh on US stocks in the second half of the year, noting that a resilient economy thus far means interest rates will stay higher for longer.
A BofA team led by Michael Hartnett is among those predicting a scenario known as “no landing” in the first half, where economic growth will stay robust and central banks will likely remain hawkish for longer. That will probably be followed by a “hard landing” in the latter part of 2023, they wrote.
Bitcoin retreated following three days of gains after the US Securities & Exchange Commission accused Do Kwon and Terraform Labs Pte of fraud over the wipeout of digital currencies he created.
In commodities, oil headed for its longest string of daily losses on the year as rising US inventories and the prospect of further tightening by the Federal Reserve eclipsed the lift from more signs that Chinese energy demand is improving.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.5% to the lowest since Jan. 30 as of 2:32 p.m. New York time
- The Nasdaq 100 fell 1% to the lowest since Feb. 10
- The Dow Jones Industrial Average rose 0.2%
- The MSCI World index fell 0.7%, more than any closing loss since Feb. 6
Currencies
- The Bloomberg Dollar Spot Index fell 0.1%
- The euro rose 0.2% to $1.0694
- The British pound rose 0.4% to $1.2043
- The Japanese yen fell 0.1% to 134.12 per dollar
Cryptocurrencies
- Bitcoin fell 0.4% to $24,447.75
- Ether strengthened 1%,rising for the fourth straight day, the longest winning streak since Feb. 4
Bonds
- The yield on 10-year Treasuries declined four basis points, more than any closing decline since Feb. 8
- Germany’s 10-year yield declined four basis points to 2.44%
- Britain’s 10-year yield advanced two basis points to 3.51%
Commodities
- West Texas Intermediate crude fell 2.8%, falling for the fourth straight day, the longest losing streak since Dec. 9
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Angel Adegbesan.
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