Saturday, November 19, 2022
Stocks closed lower on Wall Street and Treasury yields rose today after more signs from the Federal Reserve that it may need to raise interest rates much higher than many had expected to control inflation.
The S&P 500 fell 0.3%, using retailers as well as banks among the biggest weights on the benchmark index. The Dow Jones Industrial Average slipped 0.1% less, while the Nasdaq composite closed 0.3% lower.
The declines outnumbered gains on the New York Stock Exchange by a margin of nearly two to 1. Shares of smaller companies fell harder than other markets, pulling the Russell 2000 index 0.8% lower.
Bond yields rose and hovered around multi-decade highs. The yield on the two-year Treasury note rose to 4.45% from 4.37% late Wednesday. What will happen to the 10-year Treasury, which affects interest rates on mortgages and other consumer loans, rose to 3.77% from 3.69% late Wednesday.
The Fed has been increasing interest rates aggressively to tame inflation by putting the brakes on the economy. Investors hope that more indications of easing inflation could help the central bank shift to less proactive rate hikes.
The central bank, however, has been clear about its intention to continue raising interest rates, perhaps to unexpectedly high levels, to tame inflation. James Bullard, who heads the Federal Reserve Bank of St. Louis, reaffirming that position in today's presentation, suggested the Fed's short-term interest rates may have to rise to levels between 5% and 7% to dampen stubborn inflation. The central bank has raised its key interest rate to a range of 3.75% to 4%, up from almost zero until March later.
"Bullard's comments this morning sharing that they need to get fed funds (rates) between 5% and 7% were a surprise, to say the least, for the market," said Scott Ladner, chief investment officer at Horizon Investments. “It certainly took people by surprise and pushed us further.”
The S&P 500 fell 12.23 points to 3,946.56. The Dow fell 7.51 points to 33,546.32. The Nasdaq lost 38.70 points to close at 11144.96. The Russell 2000 Index fell 14.04 points to 1,839.12. The primary indexes are all headed for weekly losses.
The presentation from Bullard follows a report showing that inflation is starting to ease somewhat, but remains very hot as consumers continue to shop amid a very strong jobs market. Powerful spending and jobs remain potential bulwarks against an economy slipping into recession. It also means the Fed is likely to remain proactive and heighten the risk that it will brake the economy hard enough to justify bringing about a recession.
The stock market is "going a little further" after receiving encouraging reports of slightly reduced consumer and wholesale prices, said Ross Mayfield, investment strategist at Baird. "However, the Fed understands they have a long way to go."
"When you have a (Fed) statement that's made it clear and someone like Bullard says what he said, there's a little bit of the market going back and telling investors that this fight isn't over."
apart from concerns about inflation, the market is also worried about Russia's war on Ukraine and the lockdown in China which is hurting the global economy.
The feud in Ukraine has weighed on the power sector and any worsening could lead to a spike in the prices of oil, gas and other commodities that the region obtains. US oil prices fell 4.6%.
China's "zero-COVID" approach is already causing a supply crunch for some of Asia's biggest makers, hampering economic growth.
Markets in Asia and Europe fell.
The company also completed its latest earnings report. Macy's jumped 15% to finish beating analysts' quarterly financial forecasts and raising its earnings outlook.
Retailer Bath & Body Works jumped 25.2% after reporting strong financial results.