Stocks on Wall Street were heading for their worst week in nearly four months following comments from Federal Reserve policymakers who signaled that the US central bank was keenly aware of emerging inflationary pressures.
The benchmark S&P 500 slipped 1% on Friday, taking its losses for the week to 1.6%. About 90 percent of shares in the blue chip index were down that day, including shares of major US banks and oil majors.
Investors have turned away from some of their most popular deals of the year, including an earlier push to stocks of smaller companies seen as particularly sensitive to economic growth. The Russell 2000 Small Cap Index was on the verge of its biggest weekly loss since late January, falling 3.7%.
The movements followed comments Fed Chairman Jay Powell on Wednesday that investors took as a signal that the US central bank would act to control inflation and that policymakers were not just focusing on helping the country’s hard-hit labor market .
Fed policymakers predicted on Wednesday that interest rates would rise from record levels in 2023, compared to their earlier forecast of 2024. This view gained momentum following an interview by James Bullard, chairman of the St Louis Fed, with CNBC television on Friday. , where he said the first rate hike could come next year.
The Fed decision-makers’ turn has shaken the what is called reflation trading, and instead helped support tech stocks that had lost momentum this year. While the Nasdaq Composite was down 0.7% on Friday, it was expected to end the week down less than 0.1%.
Inflation expectations have been lowered significantly this week as investors digested the Fed’s latest move. George Saravelos, strategist at Deutsche Bank, noted that changing expectations for inflation and growth were “consistent with the continued resilience of stocks, particularly in growth stocks,” where lower bond yields make the value of future profits more attractive.
He added that the fact that the swings in financial markets have been “driven by a huge relative rotation from Russell to Nasdaq should come as no surprise.” Saravelos compared it to the market between 2010 and 2019, when growth stock valuations jumped due to moderate to low growth and low inflation.
The stock declines accompanied a rally in long-term U.S. government bond prices on Friday, with investors viewing the earlier-than-expected projections of a U.S. rate hike as a signal of the central bank’s willingness to control l ‘inflation.
The yield on the benchmark 10-year US Treasury bond, which moves backwards from its price, was 0.06 percentage point lower at 1.44%.
This return fell from around 0.9% at the start of the year, but has moderated in recent months as investors have come to consider jumped up in US inflation as temporary. Persistent inflation is eroding fixed interest rate yields on bonds.
“The bond market narrative changed on a whim,” said Tatjana Greil-Castro, co-head of public markets at credit investor Muzinich. “We first had this idea [coming out of the Covid-19 crisis] that inflation will be persistently high. Then the story was that this was the top and [inflation] would be going down, and I think the story keeps changing because we just don’t know yet. ”
The dollar was also on track for its best week since last September as yields on short-term Treasuries rose, taking into account expected future rate hikes. The dollar index, which measures the greenback against major currencies, rose 0.4% on Friday, taking its weekly gain to 1.8%.
Gold, which is priced in dollars and often moves inversely to the US dollar, traded at $ 1,773 an ounce on Friday, down nearly 6% since its steepest decline on Monday. weekly since March 2020.
“Because of the belligerent surprise of rate hike expectations, you’ve seen the dollar move quite aggressively,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Most of the market was bearish on the dollar ahead of this meeting, ”he said, after traders had previously anticipated that the Fed would maintain its ultra-loose monetary policy.
