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(Bloomberg) — Stocks retreated and Treasury yields climbed after Jerome Powell threw cold water on Wall Street’s dovish wagers by saying Federal Reserve officials aren’t fully convinced they have tightened enough.
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The S&P 500 halted what would have been its longest rally since 2004 as the Fed chief said that “if it becomes appropriate to tighten policy further, we will not hesitate to do so.” A weak sale of government bonds also weighed on sentiment, raising concern about the market’s ability to absorb new debt. US 30-year yields surged as much as 22 basis points, while two-year rates topped 5%.
Powell’s comments also made traders price in slightly higher odds of an additional Fed hike, while paring bets on a rate cut happening before July.
To Krishna Guha at Evercore, Powell’s “sterner tone” relative might reasonably be read as an effort to lean against further easing of financial conditions, hold rate cut expectations at bay and keep the option of hiking further if needed open.
His remarks were a reminder that the Fed still has a “tightening bias,” according to Michael Feroli at JPMorgan Chase & Co. The substance of these remarks was not materially different from what he said last week — “though it reads hawkish compared to market expectations, which have become quite confident that the Fed is done,” he added.
“Equity markets are edging lower as Jerome Powell implies that another rate hike may be necessary if inflation doesn’t pull back at a faster pace,” said Quincy Krosby, chief global strategist at LPL Financial. “Markets have had a strong move but have edged closer to overbought levels. Powell’s comments coupled with a disappointing auction is a logical excuse for the market to begin consolidating gains.”
To Jeffrey Roach at LPL Financial, the main reason markets are jittery is that Powell warned investors not to be misled by the “head fakes” of a few good months of data. Still, Roach expects yields to come down ahead of next week’s inflation data — which should provide some “salve” for the markets as the headline number will likely be soft.
Meantime, the amount of money that investors are parking at a major Fed facility dropped below $1 trillion for the first time in more than two years. Demand for the facility has been fading this year, especially as the Treasury ramped up fresh bill issuance, offering an alternative for short-term investors.That buying has accelerated as traders bet that the Fed is near the end of its interest-rate hiking cycle.
Mark Spitznagel, the Universa Investments founder and chief investment officer whose firm is advised by Black Swan author Nassim Nicholas Taleb, said the stock market is likely to surge — then turn drastically when the Fed starts cutting interest rates.
“That’s when things are going to get really awful,” Spitznagel said in an interview this week in New York.
On the economic front, recurring applications for US unemployment benefits rose for a seventh straight week, adding to evidence that the labor market is cooling.
Last week’s soft monthly jobs report may have encouraged investors to start thinking about a less-hawkish Fed, according to Mike Loewengart at Morgan Stanley Global Investment Office.
“In addition to the Fed signaling rate cuts aren’t on the horizon, today’s modest jobless claims total suggests the road to a cooler economy and lower inflation is going to be a long one,” he noted. “Add in the pressure that sizable Treasury issuance puts on rates, and it becomes clear that patience remains the primary virtue in this market.”
‘Big Fear’
Credit risk will replace interest-rate risk as the market’s “big fear” next year, according to Mohamed El-Erian.
“Savings have been run down, there is a cumulative impact of high interest rates,” El-Erian said in an interview on Bloomberg Television. “2024 is going to be a tougher year than 2023 was for the global economy.”
US companies have sold more than $6 billion of junk bonds this month as yields have dropped and risk assets have rallied across markets. Month-to-date supply is the highest since early May. Investors returned have returned to junk bonds after the Fed signaled it may be done with its most aggressive rate-hiking cycle in decades at its last meeting.
Elsewhere, Bitcoin rose toward the highest since May 2022 — just before the TerraUSD stablecoin collapsed and ignited a daisy chain of failures across the cryptoasset space.
Corporate Highlights:
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Apple Inc. risks having to pay a €13 billion ($14 billion) tax bill to Ireland after an adviser to the European Union’s top court said the iPhone maker’s victory in an earlier challenge should be thrown out.
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Walt Disney Co. reported better-than-expected profits and vowed to cut $2 billion in expenses as it faces pressure from activist investor Nelson Peltz.
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AMC Entertainment Holdings Inc. plans to sell as much as $350 million of shares.
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Arm Holdings Plc gave a disappointing sales forecast amid a slump in smartphone sales and uncertain timing for new licensing deals.
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Lyft Inc. reported revenue and profit that beat analysts’ estimates in the third quarter, but introduced a new performance metric that compared it unfavorably to larger rival Uber Technologies Inc.
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Rogers Communications Inc. beat estimates after posting strong wireless sales during the back-to-school period and a revenue increase in its media and cable businesses.
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Manulife Financial Corp.’s earnings got a lift from its business in Asia, where insurance sales in Hong Kong to mainland Chinese visitors continue to improve after the loosening of pandemic travel restrictions.
Key events this week:
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ECB President Christine Lagarde participates in fireside chat, Friday
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US University of Michigan consumer sentiment, Friday
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Dallas Fed President Lorie Logan and her Atlanta counterpart Raphael Bostic speak, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.8% as of 3:31 p.m. New York time
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The Nasdaq 100 fell 0.8%
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The Dow Jones Industrial Average fell 0.6%
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The MSCI World index fell 0.4%
Currencies
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The Bloomberg Dollar Spot Index rose 0.4%
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The euro fell 0.3% to $1.0672
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The British pound fell 0.5% to $1.2227
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The Japanese yen fell 0.2% to 151.29 per dollar
Cryptocurrencies
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Bitcoin rose 1.7% to $36,185.5
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Ether rose 6.8% to $2,016.15
Bonds
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The yield on 10-year Treasuries advanced 14 basis points to 4.63%
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Germany’s 10-year yield advanced three basis points to 2.65%
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Britain’s 10-year yield advanced three basis points to 4.27%
Commodities
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West Texas Intermediate crude rose 0.4% to $75.61 a barrel
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Spot gold rose 0.5% to $1,959.11 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Emily Graffeo, Sagarika Jaisinghani, Garfield Reynolds, Sidhartha Shukla, Suvashree Ghosh and Michael Mackenzie.
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©2023 Bloomberg L.P.
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