WALL Street indexes were firmly in the red after a choppy start to Thursday’s session while bond yields rose as investors digested economic data that provided the Federal Reserve little reason to ease its aggressive interest rate hiking cycle.
The Dow Jones Industrial Average fell 173.07 points or 0.56% to 30,962.02; the S&P 500 lost 44.69 points or 1.13% to 3,901.32 while Nasdaq Composite dropped 167.32 points or 1.43% to 11,552.36.
Oil futures tumbled more than 3% on demand concerns and after a tentative agreement that would avert a US rail strike as well as continued greenback strength with expectations for a large US rate increase.
Economic data showed US retail sales unexpectedly rebounded in August as Americans ramped up purchases of motor vehicles and dined out more while taking advantage of lower gasoline prices. But data for July was revised downward to show retail sales declining instead of flat as previously reported.
Separately the Labour Department said initial claims for state unemployment benefits fell for the week ended Sept 10 to the lowest level since the end of May.
Investors are widely expecting an aggressive rate hike after the Federal Open Market Committee (FOMC) meeting next week, but nervously awaiting hints from US Federal Reserve chair Jerome Powell about future policy moves, according to Quincy Krosby, chief global strategist at LPL Financial.
“The market remains choppy knowing that there’s a Fed meeting next week. Even though participants agree that it’ll be a 75 basis points rate hike, it’s what the statement adds to previous commentary and what Chairman Powell says in his press conference” that have them worried, Krosby said.
MSCI’s gauge of stocks across the globe shed 0.96% while emerging market stocks lost 0.57%.
Stocks, bonds and currencies on Thursday were showing a market “increasingly understanding the Fed is going to hike more aggressively next week”, according to Scott Ladner, chief investment officer at Horizon Investments in Charlotte, North Carolina.
Referring particularly to the still strong labour market, Ladner said “economic numbers released today are tying a bow on the situation”.
Treasury yields rose with the two-year hitting fresh 15-year highs, after data on retail sales and jobless claims showed a resilient economy that gives the Fed ample room to aggressively hike interest rates.
Also already signalling a recession warning the inverted yield curve – the gap between two-year and 10-year treasury yields – widened further to -41.4 basis points (bps) compared with -13.0 bps a week ago.
Benchmark 10-year notes were up 4.5 bps to 3.457% from 3.412% late on Wednesday. The 30-year bond last fell 5/32 in price to yield 3.4779% from 3.469%. The two-year note last fell 5/32 in price to yield 3.8646% from 3.782%.
“In this vicious cycle where the data continues to remain resilient, that would imply a Fed that would likely stay the course and continue to tighten policy,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.
Also clouding investors’ moods on Thursday was the World Bank’s assessment that the world may be edging toward a global recession as central banks across the world simultaneously hike interest rates to combat persistent inflation.
In currencies, the US dollar was slightly higher against the yen while the Swiss franc hit its strongest level against the euro since 2015.
The US dollar index which measures the greenback against a basket of major currencies rose 0.091% with the euro up 0.18% to $0.9995.
The Japanese yen weakened 0.19% versus the greenback at 143.44 per US dollar while sterling was last trading at US$1.1469, down 0.57% on the day.
Before the tentative labour agreement, fears of a US railroad worker strike had supported oil prices due to supply concerns on Wednesday. In addition, the International Energy Agency (IEA) said this week that oil demand growth would grind to a halt in the fourth quarter.
US crude settled down 3.82% at US$85.10/barrel while Brent finished at US$90.84, down 3.46% on the day.
Gold dropped to its lowest level since April 2021, hurt by elevated US Treasury yields and a firm US dollar as bets of another hefty Fed rate hike eroded bullion’s appeal.
Spot gold dropped 1.9% to US$1,664.46/ounce while US gold futures fell 2.02% to US$1,662.30/ounce. – Sept 16, 2022