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The Dow falls 550 points as rising bond yields beat stocks after Fed rate hike

US stocks tumbled sharply late Friday afternoon, with the S&P 500 index trading around its June 2022 closing low reached in June, as major benchmarks headed for weekly losses after bond yields and the dollar fell amid the US rate hike Federal Reserve rose on Wednesday.

For the week, the Dow is on track to fall 4.3%, while the S&P 500 is on track to slip nearly 5%, and the Nasdaq is headed for a decline at last check, according to FactSet data of 5.3%.

What moves the markets

US stocks fell sharply on Friday as market volatility rose after the US Federal Reserve announced a third consecutive jumbo three-quarters-of-a-point rate hike on Wednesday.

“Recession risks have increased and nobody wants to be the last one to squeeze through the door,” Russell Evans, managing principal and chief investment officer at Avitas Wealth Management, said in a phone interview on Friday. “The market is rushing to get ahead of what the market sees as inevitable.”

Investors are concerned that a so-called soft landing for the US economy is waning as the central bank maintains its aggressive pace of tightening monetary policy to combat high inflation. After Fed Chair Jerome Powell announced his latest big rate hike on Wednesday, he again warned that his job was not done.

“People interpreted this week’s actions and rhetoric as more aggressive,” Evans said.

The S&P 500 is trading around its 2022 closing low of 3666.77 hit on June 16, while the Dow is trading below its June closing low. That puts the Dow on track for a possible new low this year.

See: The Fed will tolerate a recession, and 5 other things we learned from Powell’s press conference

Treasury yields have soared since the Fed announced its interest rate decision on Wednesday, putting pressure on the stock market.

The yield of the 10-year Treasury note TMUBMUSD10Y,
3,690%
was trading 1 basis point lower at 4.68% on Friday afternoon after rising to its highest price since February 2011 on Thursday, based on the 3:00 p.m. Eastern time level, according to Dow Jones Market Data.

Meanwhile, the 2-year Treasury yield is TMUBMUSD02Y,
4.211%
Soared to its highest level since October 2007 on Thursday and was trading about 6 basis points higher at about 4.19% on Friday afternoon, FactSet data showed at its latest check.

“Price action has been really, really chaotic all week and I think it was mostly driven by the bond market,” said Mike Antonelli, market strategist at Baird.

But it’s not just the Fed that is scaring markets. A host of other global central banks also hiked interest rates this week. US stock traders are paying particular attention to the UK, where markets have been roiled by the Bank of England’s recent rate hike.

See: Bond yields rise, the pound slips to a 37-year low as the UK unveils deficit-funded tax cuts, raising investor concerns

“We have new tax cuts in the UK that could lead to even more rate hikes from the Bank of England,” Jeff Kleintop, global investment strategist at Charles Schwab, said in a phone interview on Friday.

“The UK tax cuts are likely to inject more money into the economy, which is likely to create more demand and fuel inflation further,” Kleintop said. This, in turn, could prompt the Bank of England to hike rates even more amid investor concerns that central bank tightening is increasing the risk of a global recession, he said.

One of the biggest challenges facing markets right now is the rise in real interest rates – that is, Treasury yields minus the breakeven inflation rate of inflation-linked bonds. Real interest rates have risen sharply over the past six weeks as investors reacted to factors including data showing surprisingly strong inflation in August.

“Due to the discount effect, higher real interest rates lower the equity risk premium, and that’s the big challenge for the market,” said Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co.

If there’s a silver lining for markets at this point, it’s that stocks and bonds are looking a bit oversold here, as a lot of bad news — including a Fed interest rate hike of over 4.5% — has already been priced in, Conger said. “If there’s any good news…that could take us even higher,” he added.

On the economic data front, strong readings from the flash S&P Global US purchasing managers’ indices for both manufacturing and services helped the composite PMI rise to 49.3 in September, beating the FactSet consensus reading.

It’s still “soft reading,” Kleintop said of Charles Schwab. “It would still suggest the risk of a slight contraction in GDP in the third quarter,” he said.

The energy sector SP500.10,
-6.75%
was the hardest-hit among sectors of the S&P 500 by Friday’s plunge, suffering a fall of about 7% as US oil prices fell below $80 a barrel at last check, according to FactSet data. Consumer Discretionary SP500.25,
-2.29%
Stocks were also hit hard, losing around 2.6%.

Meanwhile, according to Kleintop, the market is “very likely to see a downside forecast” in the upcoming third-quarter earnings season after seeing robust corporate earnings growth this year. “This could be a final support for the market, which could start to deteriorate,” he warned.

Evans of Avitas Wealth Management says he’s been looking for buying opportunities in the stock market mayhem recently. “I added a few tech stocks, but very large established tech stocks,” he said.

company in focus
  • Costco wholesale corp
    COSTS,
    -4.26%
    Shares fell sharply to a three-month low after reporting fourth-quarter results late Thursday. The wholesaler said it was seeing higher freight and labor costs and reported operating margins were slightly below consensus expectations.

  • shares of Chevron Corporation
    cvx,
    -6.53%
    and Boeing Co.
    BA,
    -5.37%
    help drive the Dow lower.

  • FedEx Corporation
    fdx,
    -3.37%
    Shares fell as the company announced cost cuts and shipping rate increases a week after withdrawing its outlook, which had caused its shares to plummet and hurt shares even more broadly.

—Steve Goldstein contributed to this report.

https://www.marketwatch.com/story/dow-futures-slide-nearly-200-points-and-dollar-steamrolls-rivals-on-fed-tightening-view-11663925613?rss=1&siteid=rss The Dow falls 550 points as rising bond yields beat stocks after Fed rate hike

Brian Lowry

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