Stocks Decline as Investors Expect an Aggressive Fed and an Economic Slowdown
Last Updated 4:15PM EST
Equities ended Thursday’s trading session in the negative. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 2.42%, 3.25%, and 4.02%, respectively.
The energy sector performed the worst today, as it declined 5.51%. Consumer staples outperformed but still fell 0.75%. Conversely, crude oil is positive on the day and is now trading at almost $117 per barrel, while the U.S. 10-Year Treasury yield continues to fall, now hovering around 3.24%.
On Wednesday, the Federal Reserve released its inflation and economic growth projections, which include the central bank’s expectation for the Federal Funds rate. The Fed expects a rate of 3.4% by December 2022, translating to a range of 3.25% to 3.5%.
However, the market doesn’t seem to believe it, as investors expect a December Fed Funds Rate of 3.5% to 3.75% as the most likely scenario, with a probability of 46.3%.
In addition, to add to the negative sentiment, the Federal Reserve Bank of Philadelphia released its Manufacturing Index report on Thursday, which measures the general business conditions in Philadelphia.
The report came in at -3.3 compared to the forecast of 5.5, meaning that conditions worsened month-over-month. This was the first decline since the May 2020 report.
Housing Starts See the Largest Decline in Two Years
Last Updated 3:00PM EST
Stocks are down, heading into the final hour of Thursday’s trading session. As of 3:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 2.7%, 3.6%, and 4.2%, respectively.
The energy sector is performing the worst today, as it is down almost 6%. The consumer staples sector continues to outperform but is still down about 1%. Furthermore, crude oil turned positive on the day and is now trading at almost $118 per barrel, while the U.S. 10-Year Treasury yield hovers around 3.3%.
On Thursday, the Census Bureau released its U.S. Housing Starts report, which measures the change in new residential buildings that began construction in the reported month on an annualized basis. For the month of May, housing starts came in at 1.549 million versus expectations of 1.701 million.
To make matters worse, on a month-over-month basis, housing starts fell by 14.4%. This was the largest decline since the report from May 2020, when COVID-19 was in its early stages.
In addition, U.S. Building Permits also missed expectations with a print of 1.695 million compared to the forecast of 1.785 million. For reference, the prior month’s report came in at 1.823 million, equating to a decline of approximately 7% month-over-month.
Stocks Remain in the Red; Initial Jobless Claims Come in Higher than Expected
Last Updated 12:00PM EST
Equities are red halfway into Thursday’s trading session. As of 12:00 p.m. EST, The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 2.2%, 3.1%, and 3.8%, respectively.
The consumer staples sector (XLP) is the leader so far but is down 0.5%. Alternatively, the consumer discretionary sector is the laggard, with a 4.4% decline. Furthermore, crude oil is off its lows and is now trading in the mid-$115 range, while the U.S. 10-Year Treasury yield is hovering around 3.32%.
On Thursday, the Department of Labor released its Initial Jobless Claims report, which came in worse than expected. In the past week, 229,000 people filed for unemployment insurance for the first time. Expectations were for 215,000 individuals.
When using the four-week average, initial jobless claims were 218,500. However, it’s worth noting that this figure has been steadily trending upwards each week since the start of April 2022.
Also important, Continuing Jobless Claims, which measures the number of unemployed people who qualify for unemployment insurance, also came in slightly higher than expected, at 1.312 million versus the estimate of 1.302 million.
Although ticking slightly higher from the previous week, Continuing Jobless Claims are in an overall downtrend and are currently sitting near their lowest levels since 1970. This suggests that more individuals are finding work than those who are filing for the first time.
It will be interesting to see if this trend continues as interest rates rise while economic growth continues to slow down.
The Market Falls as the Economy Might Already be in a Recession
Last Updated 10:05AM EST
Equities are off to a bad start in Thursday’s trading session as yesterday’s gains are erased. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 2.3%, 3%, and 3.4%, respectively.
All sectors are bleeding today. The consumer discretionary sector (XLY) continues to see volatility as yesterday’s best performer turns into one of today’s laggards, with Energy (XLE) being the only sector performing worse. Both are down more than 4%.
In addition, WTI crude oil and U.S. Treasuries aren’t safe either. As of this writing, oil has fallen from its recent high of $123.66 on Tuesday to its current price of $112.60. Meanwhile, the U.S. 10-Year Treasury yield spiked 14 basis points to 3.43%.
The current fear in the market is likely due to the Atlanta Federal Reserve’s GDPNow tracker, which is an estimate of GDP in real-time, turning negative. Indeed, it is now estimated that GDP will decline by 0.0017% in the second quarter.
If this estimate is correct, it would mean that the U.S. economy has officially entered a recession, which is defined as two consecutive quarters of GDP decline.
Pre-Market Update
Stock futures fell sharply in the early hours of Thursday morning as the Federal Reserve hiked interest rates by 75 basis points, ending the speculation that had kept the market at the edge of its seat.
Futures on the Dow Jones Industrial Average (DJIA) moved 1.88% lower, while those on the S&P 500 (SPX) fell 2.3%, as of 7:07 a.m. EST, Thursday. Meanwhile, the Nasdaq 100 (NDX) futures advanced by 2.72%.
Fed Chair Jerome Powell said that though he is aware that the interest hike is unusually large and uncommon (the largest since 1994), another 75 bps increase in July is not completely off the table. The July hike can be anywhere between 50 and 75 bps, and that decisions on the policy will be made “meeting by meeting.”
By now, everyone has been made aware that inflation that has gotten out of hand, and can only be curbed if the Fed pulls up the interest rate. This would force demand to cool, so that supply can match its pace. The Fed remains aggressively focused on bringing inflation down to 2% by the end of the year.
Though the market had largely expected this hike rate, sentiments fell after Fed officials significantly reduced the 2022 economic growth outlook to 1.7% GDP rise, which is lower than 2.8% growth projected in March.
The move in the futures market comes after the major indexes ended Wednesday’s regular trading session in the green, with the Dow up 1%, while the S&P 500 climbed 1.46%. The tech-heavy Nasdaq 100 spiked 2.49%.
The short-term interest rate hike is significant to institutions and consumers alike because this is the benchmark rate at which banks borrow, passing the cost on to consumers in the form of higher interest on debt products.
Global inflation has been grabbing everyone’s attention for quite some time now, and a slew of interest rate hikes across major nations have been announced. Most recently, the Bank of England pulled its base rate up by 25 bps to 1%, marking the highest interest rate in 13 years, in order to tame the 40-year high inflation of 9% (as of April). However, the Bank also warned that the British economy may fall into recession.
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