Stocks fell on Wednesday after the minutes of the Federal Open Market Committee’s latest meeting confirmed that the Federal Reserve will start raising interest rates as its inflation concerns grow.
Dow Jones Industrial Average
It fell 393 points, or 1.1%, after being in the green before the Federal Reserve released its December meeting minutes. the
Standard & Poor’s 500
It’s down 1.9% after being flat for most of the day, tech slumps
The Nasdaq fell 3.3%, its biggest drop since March 202. The Nasdaq also fell on Tuesday and is now down 6% since its all-time high in November.
The release of the Fed’s meeting minutes is usually tedious, as they do nothing more than confirm what the Fed actually said at its last meeting. The latter was true for these minutes, for the most part, but the reaction was far from dull.
While the Federal Reserve at its December meeting revealed its plans to speed up ending bond buying and indicated that a rate hike could begin sooner than planned, seeing the hawkish tone in the minutes seemed to surprised market participants. The fact that central bankers discussed the possibility of shrinking their balance sheet, in particular, added to the hawkish tone, a tone that suggested the Fed, perhaps, is more concerned about inflation than investors had thought.
“The minutes further confirm the Fed’s recent bullish turn and its desire to begin removing monetary easing this year,” wrote Lawrence Gillum, fixed income analyst at LPL Financial. “While most of the information was known, ‘some’ members wanted to start reducing the Fed’s $8.5 trillion balance sheet soon after the first rate hike, and it will likely come under more scrutiny at upcoming meetings. The Fed seems to want to That it is moving faster than it has in the past and that returns, across the curve, are moving higher with the potential for a faster schedule tightening.”
It is not entirely clear now how aggressive the Fed will be in removing support from the markets and the economy. For most of the pandemic era, the Fed has been very “pessimistic” with its policy, or supportive of markets and spending in the economy. Now, it’s getting “hardcore”, which seems like uncharted territory for investors.
“It’s an unknown being on the other side of the Fed being so peaceful since Covid,” said Eric Meirlis, president of Citizens Global Markets Trading.
Tech companies, in particular, have contributed to her chin. The reason: High bond yields, which make future earnings less valuable — and many tech companies are counting on big dividends after many years.
The 10-year Treasury yield rose to 1.7% from 1.51% Friday as prices fell – prices and yields are moving in opposite directions. It’s the highest return since late October and not far from the pandemic-era high of 1.75%. The yield appears to be playing catch up with higher inflation expectations, which require prices to rise more than 2% annually over the long term.
Treasuries were under pressure [yields rise when prices fall] Throughout the Wednesday session and while there is an argument that technical factors are stretched to the point that selling may stall, we remain comfortable moving towards higher rates for now,” wrote Ian Lingen of BMO Capital Markets.
Investors got some new information on the state of the economy on Wednesday. The ADP said the US economy added 807,000 private sector jobs in December, more than double expectations. Wall Street is now awaiting Friday’s non-farm payrolls report, which economists expect will reveal 422,000 jobs added.
Markets want to see that people are back to work at a rapid pace, but not so fast that the Fed accelerates its rate hike schedule.
This makes Friday’s employment report crucial. If the number of jobs added approaches – or exceeds expectations – it could reinforce the idea that the economy is at “maximum job opportunity,” validating the Fed’s tightening. “[Many] We believe we are nearing maximum employment while “many” believe we are already pretty much there, Stephen Stanley, chief economist at Amherst-Pierpont, wrote at the Federal Open Market Committee. “Employment data may be just as important as inflation.”
Here are five stocks on the move on Wednesday:
(Index: BYND) It was down 5.1% after rising 9% in late trading Tuesday after the company said its vegan fried chicken product will be available at KFC locations in the US next week.
PINS stock is down 0.9% even after being upgraded to Overweight from Neutral at Piper Sandler.
(PFE) (PFE) stock rose 2% after being upgraded to Buy from Neutral on Bank of America.
(CRM) stock fell 8.3% after it was cut to Neutral by Buy at UBS.
(W) stock is down 8.5% after falling to neutral from Outperform in Wedbush.