S&P 500, Nasdaq post worst day in month after strong data fuels worry about Fed rate hikes

What drove markets

Strong wage growth numbers released Friday were followed up on Monday by a robust reading for the U.S. services sector — both of which helped to stoke fears that the Fed’s interest-rate hikes, along with the central bank’s modest balance-sheet unwind, haven’t had much of an impact on the tight labor market.

The ISM barometer of U.S. business conditions in the service sector came in stronger than expected, rising to 56.5% in November, a healthy showing that signals the U.S. economy is still expanding at a steady pace.

“If nothing else, the ISM services report is being interpreted as very strong, and thus the economy is overheating and that means more Fed tightening,” said Will Compernolle, a senior economist at FHN Financial in New York. “Consumer resilience has proven to be more intense than I would have expected. In the two most interest-rate sensitive sectors — housing and autos — tightening has channeled into markets in meaningful ways.”

But there has been so much pent-up demand, that higher interest rates haven’t been cooling overall spending as much as the Fed would like because companies are still having to fill a backlog of orders, he said via phone.

In other economic data, the final November S&P Global U.S. services PMI edged up to 46.2 from 46.1, but remained in contractionary territory.

November jobs data released on Friday showed average hourly wages grew over the past year by more than 5% as of November, beating economists’ expectations and stoking concerns that robust wage growth would continue to fuel inflation, market strategists said.

Worries about a more-aggressive Fed also helped to drive Treasury yields higher, adding to the pressure on stocks. The yield on the 10-year note rose 9.6 basis points to 3.6% on Monday. Treasury yields move inversely to prices, and yields had fallen sharply over the past month, driven by shifting expectations about the pace of Fed rate hikes.

Monday’s ISM services figure “surprised to the upside, suggesting that the economy is still running above its long-run sustainable path and that the Fed is going to have to slow the economy more than expected in 2023,” Bill Adams, the Dallas-based chief economist for Comerica Inc. CMA, said via phone.

In other markets news, signs that China’s government is easing its COVID restrictions helped Hong Kong’s Hang Seng Index
HSI,
+4.51%
finish with a 4.5% gain.

See also: Chinese ADRs and casino operators rally on signs of easing COVID

Meanwhile, oil futures ended lower on Monday, a day after Sunday’s decision by OPEC and its allies to keep production quotas unchanged.

Falling equity prices helped drive the CBOE Volatility Index
VIX,
+8.87%,
also known as the VIX, back above 20 on Monday. The volatility gauge had fallen sharply in recent weeks as stocks rallied, potentially signaling complacency that could ultimately hurt stocks, said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.

Companies in focus

• Tesla Inc.
  TSLA,
  -6.37%
  shares finished 6.4% lower after reports of a looming production cut at its factory in Shanghai, though the electric-vehicle manufacturer denied the reports.

• GameStop Corp.‘s Class A shares
  GME,
  -7.12%
  ended down by 7.1% ahead of the company’s third-quarter results, which are set to be released after the market closes on Wednesday. Analysts are looking for a narrowing loss from the videogame retailer.

• Shares of U.S. airlines and aircraft makers traded higher on Monday, bucking the broader trend in stocks. Boeing Co.
  BA,
  +1.22%
  and United Airlines Holdings Inc.
  UAL,
  +2.60%
  were among the best performers in the S&P 500, finishing up by 1.2% and 2.6%, respectively.

• Shares of Salesforce, Inc.
  CRM,
  -7.35%
  ended down by 7.4% after the company confirmed its CEO Stewart Butterfield is leaving the company following Bret Taylor, the co-CEO, who departs at the end of January.

––Jamie Chisholm contributed reporting to this article.