Stocks and long-dated Treasuries maintained losses after minutes from the latest Federal Reserve meeting showed officials were laser focused on tamping down inflation.
The S&P 500 ended trading 1 per cent lower while the tech-heavy Nasdaq 100 shed 2.2 per cent as the minutes signaled the U.S. central bank is prepared to raise rates sharply and reduce its balance sheet to cool the economy.
The commentary was largely in line with what Fed officials have said in recent days, showing a willingness to raise rates 50 basis points at the May meeting and start winding down the balance sheet quickly. The 10-year Treasury yield rose to 2.59 per cent while the two-year rate dipped to 2.49 per cent.
Ahead of the minutes, traders had bet the Fed would implement 225 basis points of rate hikes by the end of the year, adding to the 25 basis points already delivered in March. The central bank hasn’t tightened that much in one year since 1994, a famously brutal year for bond investors that even included a 75 basis-point hike.
“Another very hawkish readout indicates the Fed is willing to walk the walk,” Sean Bandazian, senior investment analyst for Cornerstone Wealth, said. “Aside from the pace of the balance sheet roll off, most telling from the minutes was the preparedness to hike 50 basis points last month. If not for the crisis in Eastern Europe we could have been staring down at least three meetings in a row with 50 basis point hikes, which the market was not expecting. Clearly they’re sending all the smoke signals of the most aggressive tightening cycle in a generation.”
Shares of consumer discretionary and technology stocks led equity losses, with traders flocking to traditionally defensive companies like utilities, real estate and consumer staples. The dollar strengthened against peers, and crude oil continued a slide in New York.
“The Fed is going to be very aggressive going forward even if it has a negative impact on economic growth and the stock market,” Matt Maley, chief market strategist at Miller Tabak + Co., wrote in a note. “If the Fed does indeed feel the need to change course before they hike rates that many times, the stock market will be a lot lower and so will the bond market. Put another way, by the time the Fed reacts, the markets will have already felt a lot of pain.”
Russia’s growing isolation over the war in Ukraine only adds to concerns as disrupted commodity flows could pressure price increases further. Fresh sanctions on Moscow are expected. Earlier, Russia’s finance ministry also said a Eurobond payment was sent in rubles after foreign banks declined to process coupon payments, raising the specter of a technical default.
“There’s clearly some negative momentum in markets. They’re very nervous; volatility is high. Markets probably have an inclination to sell off further, but you have to look at what’s already priced in and how much things have moved and start thinking that, at some stage, there’s going to be the tactical opportunity to actually dip a toe into this market,” April LaRusse, head of investment specialists at Insight Investment, said by phone.
Key events to watch this week:
- St. Louis Fed’s James Bullard, Atlanta Fed’s Raphael Bostic, Chicago Fed’s Charles Evans speak at separate events Thursday
- Reserve Bank of India rate decision Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1 per cent as of 4:01 p.m. New York time
- The Nasdaq 100 fell 2.2 per cent
- The Dow Jones Industrial Average fell 0.4 per cent
- The MSCI World index fell 1.3 per cent
Currencies
- The Bloomberg Dollar Spot Index rose 0.2 per cent
- The euro was little changed at US$1.0899
- The British pound was little changed at US$1.3075
- The Japanese yen fell 0.2 per cent to 123.79 per dollar
Bonds
- The yield on 10-year Treasuries advanced six basis points to 2.60 per cent
- Germany’s 10-year yield advanced three basis points to 0.65 per cent
- Britain’s 10-year yield advanced five basis points to 1.70 per cent
Commodities
- West Texas Intermediate crude fell 4.9 per cent to US$96.98 a barrel
- Gold futures were little changed
Advertisement