U.S. stocks opened lower on Thursday, with the S&P 500 index trading at its lowest level in nearly two weeks, after Federal Reserve Chairman Jerome Powell said speculation about the central bank pausing interest-rate hikes was premature.
How stocks are trading
- The S&P 500 SPX fell 36 points, or 1%, to 3,723.
- The Dow Jones Industrial Average DJIA tumbled 201 points, or 0.6%, to 31,948.
- The Nasdaq Composite COMP shed 139, or 1.4%, to 10,379.
Stocks were volatile on Wednesday with the Dow briefly breaking above 33,000 as Federal Reserve Chairman Jerome Powell announced the Fed’s fourth 75 basis point interest-rate hike and hinted at a smaller hike in December in his prepared policy statement.
However, the brief bounce in stocks didn’t last as all three major indexes finished the session sharply lower, with the S&P 500 and Nasdaq logging their largest one-day drop since Oct. 7.
As of early Thursday, the Nasdaq was trading at its lowest level since Oct. 14, while the S&P 500 traded at its lowest level since Oct. 21 and the Dow traded at its lowest level since Oct. 26.
What’s driving markets
The Fed on Wednesday delivered the expected 75 basis point hike in its benchmark interest rate target to a range of 3.75% to 4%.
However, investors fixated on comments made during Powell’s press conference which suggested that the Fed is nowhere near pausing its campaign of raising interest rates.
“It is very premature to be thinking about pausing. When people hear lags, they think about pauses. It’s very premature, in my view, to talk about pausing our rate hikes. We have a way to go,” Powell said.
He also suggested that the Fed’s benchmark rate may need to top the level of core inflation to stamp out inflation, a hint that the Fed funds rate may need to be pushed above 5% and left there for a while to succeed in dragging inflation back down to its 2% target.
Eric Diton, president and managing director of the Wealth Alliance, blamed the backlash in equity prices on the dashing of investors’ hopes that Powell might signal that the end of the Fed’s tightening cycle might be near.
“Powell has been crystal clear that this is not a short-term tightening event,” Diton said. “They plan to keep rates tighter for a while and until they see a response from inflation.”
And even if they opt for smaller rate rises in December and January, it’s clear the terminal rate might be even higher than markets had anticipated, said Gene Goldman, chief investment officer of Cetera Financial Group.
Expectations for a higher terminal rate were reflected in Fed funds futures, which track expectations surrounding where the Fed’s key benchmark rate might be in the future. According to the CME’s FedWatch tool, traders were pricing in a 31% chance that the benchmark could climb to between 5.25% and 5.5%, compared with a 16.6% chance on Wednesday.
Another rise in the 2-year Treasury yield was adding to pressure on stocks, Goldman added, since the 2-year rate is a proxy for expectations surrounding where the Fed funds rate might be a year or more into the future.
As equity investors brook losses, Goldman said he expects to hear from a bevy of senior Federal Reserve officials who he expects will try to clarify Powell’s remarks in an attempt to calm markets.
“Now that the quiet period is over for the Fed, you’ll see a lot of Fed speak coming out and talking down some of the market’s assumptions,” Goldman said.
The 2-year yield BX:TMUBMUSD02Y rose 15 basis points to 4.699% as the difference between the 2-year and 10-year yields further inverted to more than -60 basis points at one point. Higher yields also helped push the dollar higher, with the ICE U.S. Dollar Index DXY climbing 1.5% o 113.
Julian Emanuel, senior strategist at Evercore ISI, said in a note that Powell’s “hawkish message underpins volatility into and beyond the [Nov. 8 U.S. midterm election]. A retest of the October lows, particularly [by the] growth centric Nasdaq 100, becomes base case.”
Meanwhile, the tech-heavy Nasdaq was underperforming due to both the sharp rise in the 2-year yield, and the disappointing earnings from semiconductor stalwart Qualcomm QCOM. The company’s shares were down more than 8% in morning trade Thursday.
Investors are awaiting Friday’s October jobs report, but in the meantime a weekly reading on the number of Americans applying for jobless claims fell slightly to 217,000, clinging near pandemic lows.
See: New jobs created in October likely to dip to two-year low, but not enough to tame inflation
The ISM services sector activity index for October dropped to 54.4% in October from 56.7, while September factory orders rose 0.3%, matching consensus.
Looking ahead, investors will receive earnings reports from Starbucks SBUX, PayPal PYPL, and Warner Bros Discovery WBD after the close.
Companies in focus
- Moderna Inc. shares MRNA were flat after falling sharply ahead of the bell Thursday as the COVID vaccine maker posted far weaker-than-expected third-quarter earnings and said short-term supply constraints would impact 2022 advance purchase agreements.
- Peloton Interactive Inc. shares PTON tumbled 6.7% after falling nearly 20% in premarket trade as the maker of connected fitness equipment saw its losses narrow but forecast significantly lower revenue for the holiday quarter than analysts had anticipated.
- Restaurant Brands International Inc.’s CA:QSR stock rose 3.3%, boosted by the company’s better-than-expected third-quarter results.