Stocks fluctuated Thursday as investors took pause on bets tighter monetary policy from the Federal Reserve would crimp richly valued technology stocks.
The S&P 500 was little changed while the tech-heavy Nasdaq 100 added 0.06%, recovering from the index’s biggest slump since March on Wednesday. Treasury yields extended a spike along with other government bonds. The dollar fluctuated, while the yen caught a haven bid.
Minutes from the Fed’s December meeting showed officials’ increasing preference for a faster path of rate hikes and a shrinking of the bank’s $8.8 trillion balance sheet. That could bring curtains down on unprecedented policy accommodation, which underwrote asset prices through the worst of the pandemic. The Fed is now at the core of the investment outlook for 2022, overriding continuing concerns such as slowing global growth, China’s regulatory crackdown and supply bottlenecks.
“We knew coming into 2022 that the Fed was going to be a creator of volatility within the market and we’re seeing that right out of the gate at the start of the year,” Lindsey Bell, chief markets and money strategist at Ally, said by phone. “The good news is that today things seem to be stabilizing a little bit after yesterday’s knee-jerk reaction.”
The minutes, released Wednesday after the close of European markets, sparked a rout in U.S. stocks concentrated in expensive technology names. The Nasdaq 100 tumbled 3.1% after the release, while the 10-year Treasury rate crossed the 1.70% mark.
“Markets are concerned that we’ve never seen the Federal Reserve both lift interest rates off zero and reduce the size of its balance sheet at the same time. There was a two-year gap between those two events in the last cycle, so it is a valid concern,” wrote Nicholas Colas, co-founder of DataTrek Research. “Our advice is to invest/trade very carefully the next few days.”
U.S. equities struggled for direction in morning trading, while bonds extended a global selloff. German 10-year borrowing costs jumped to the highest since May 2019, while their Italian counterparts surged to a June 2020 high. Likewise, Japan’s benchmark yield climbed to the highest since April and the U.K.’s 10-year yield jumped to an October high.
U.S. jobless claims figures released Thursday did little to change the market mood. The claims rose to 207,000 last week, the release showed, but stayed within the range of forecasts by 30 economists.
“With the labor market somewhat under control, jobless claims are likely going to fade into the background while the Fed is focused on their inflation mandate,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial. “Inflation is center stage when it comes to the Fed’s potential moves. While hiring has certainly been a challenge, the employment picture has been improving and edging toward what it was pre-pandemic.”
Joseph Quinlan, chief market strategist of Bank of America Global Wealth and Investment Management, said on Bloomberg TV and Radio that early in a Fed tightening cycle, equities tend to perform well.
“It’s at the end of the Fed tightening cycle when you see the rolling over. So we’re still constructive on equities, particularly with real interest rates being negative,” he said. “So don’t fear the Fed just now. The messaging is important obviously — a little bit of a shock yesterday. But in general, I don’t think yesterday really changed much in terms of the near-term outlook for equities.”
Treasuries extended their losses, with the rates between the two-year and 10-year tenors adding at least two basis points each. In Europe, stocks fell, while in Hong Kong, the Hang Seng Tech Index pared back losses to trade higher.
Bitcoin tumbled to $42,900. Crude-oil futures extended gains. Gold fell.
What to watch this week:
- Fed’s Bullard discusses the U.S. economy and monetary policy in an event on Thursday
- Fed’s Daly discusses monetary policy on a panel Friday
- ECB’s Schnabel speaks on a panel Saturday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 10:27 a.m. New York time
- The Nasdaq 100 rose 0.1%
- The Dow Jones Industrial Average fell 0.2%
- The Stoxx Europe 600 fell 1.4%
- The MSCI World index fell 0.6%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1304
- The British pound fell 0.2% to $1.3525
- The Japanese yen rose 0.3% to 115.72 per dollar
Bonds
- The yield on 10-year Treasuries advanced two basis points to 1.73%
- Germany’s 10-year yield advanced two basis points to -0.06%
- Britain’s 10-year yield advanced six basis points to 1.14%
Commodities
- West Texas Intermediate crude rose 2.3% to $79.61 a barrel
- Gold futures fell 1.9% to $1,789.80 an ounce
