After trying to stabilize early in yesterday’s session to try to recover part of Monday’s late selloff, at 10am stocks went into a severe downside shellacking after Fed Chair Powell spoke about the outlook for inflation and interest rates going forward.
The Dow, which was higher by 22, sank very badly as the session moved along and finally ended with a closing decline of 575 down to 32,856 led by selling in AMGN, CAT, HD and UNH. It now has the ignominious distinction of actually being lower for 2023.
The S&P followed the same path with a nominal 2 point early advance being eventually turned into a closing decline of 62 down to 3986 and we have now gone round-trip with the possibility of another test of that 3940 200-day moving average after getting as high as 4078 earlier in the week.
The Nasdaq also did the same with an early gain of 30 getting turned into a decline of 145 down to 11,530. The Russell 2000 Index of small stocks lost 21 down to 1878 while the VIX finally shot up as it should on these large down days and ended at 19.59 and once again the 18.49 level from last Friday should have been a warning sign that things were due for a setback as the VIX inevitably goes higher once it reaches that 18 area. And this means that the market has to go lower.
So what did Fed Chair Powell say that resulted in this downside disaster and it was that he warned that the central bank could increase rates more intensely than previously thought if pressure stays high on inflation. Inflation and what the Fed is doing about it have been at the center of the market’s sharp swings this year. After seeming to be on a steady decline since last summer, reports on inflation last month came in surprisingly hot. So did other data on the economy.
That has raised fears that inflation is staying stickier than feared and that the Fed will have to raise rates higher than earlier thought. Higher rates can drag down inflation because they slow the economy, and also raise the risk of a recession later on.
Chair Powell confirmed some of those fears and said the recent data means “the ultimate level of interest rates is likely to be higher than previously anticipated.” He also said in his testimony to the Senate Banking Committee that the Fed is ready to increase the pace of its hikes again if needed.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said. “Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Naturally the bond market has been pushing rates up as the yield on the 10-year Treasury topped 4% last week and hit its highest level since November. Yesterday it again approached 4% after Powell’s comments before falling back to 3.97% from 3.96% late Monday.
The two-year Treasury yield shot up to 5.01% from 4.87% and is at its highest level since 2007. This means that the yield curve is now than inverted by 104 basis points which is probably the widest in more than 40 years.
Traders now see a better than two-in-three chance the Fed will accelerate its rate hikes and by 50 basis points at the March 22nd meeting. This is a complete reversal from a day earlier, when the widespread belief was that they would stay with a smaller increase of 25 which they did the last time.
On the other hand, we still have Friday’s jobs report and then next week we will see both the latest C.P.I. and P.P.I. numbers before the next meeting, so these reports will certainly add to the drama.
The challenge for the market has been that the economy has actually been too strong despite all the rate increases the Fed has thrown at it. While that resilience calms worries that a recession may hit imminently, it likely means rates will need to stay higher for longer. That in turn raises the risk of a deeper recession down the line.
The big shifts among investors about where inflation and the Fed are heading have led to sharp movements for markets. In January, stocks rallied and bond yields eased as hope blossomed that inflation would cool and get the Fed to take it easier on interest rates. Then, last month’s torrent of strong data dashed those expectations and sent stocks falling and bond yields jumping.
Despite yesterday’s downside disaster, a couple of stocks did well on earnings such as DES and SE, and the real outlier was the former WeightWatchers as it soared by 79% after saying it is getting into the prescription weight loss business with the purchase of telehealth platform Sequence.
Earnings this week include: yesterday – DKS, SE higher while THO was lower; today – CRWD, CASY, CPB, KFY higher and SFIX lower; tonight – MDB; Thursday – ORCL, ULTA.
Economic reports will see: yesterday – Powell testimony; today – January JOLTS (job openings) report came in at 10.8 million, January trade deficit widened to $68.3 billion due to an increase in imports; Powell testimony to House Financial Services Committee, Fed Beige Book; Friday – February jobs report which is expected to show a gain of around 200,000, unemployment rate of 3.4%.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.