Stock traders pressed the sell button on Fed hawkish bets: closing markets

(Bloomberg) – Wall Street was faced with reality, with data showing a boiling labor market that will likely keep the Federal Reserve on its aggressive hiking trail. Those bets sent stocks plummeting and drove US 10-year yields to their longest weekly rising streak since 1984.

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For David Donabedian of CIBC Private Wealth US, the report puts an “exclamation mark” on the idea that the process of market decline is going to be “long”. In this “bizarro world” of big bulls, traders may see strong data as a reason to prepare for turmoil, says eToro’s Callie Cox. The conclusion for Brown Brothers Harriman’s Win Thin is that a 75 basis point Fed boost in November is a “done deal”, with another increase of that size in December becoming a “real possibility”.

Nearly 95% of S&P 500 companies have fallen. The slide came just days after the gauge recorded its biggest consecutive rally since the start of the pandemic amid a debate over whether the Fed would be closer to the “peak of warmongering”. Those gains gave the measure its best week in a month, even with the post-jobs drop. The Nasdaq 100 fell almost 4% on Friday.

Ten-year yields approached 3.9% amid their 10th consecutive weekly rise. The dollar advanced. The swap contract for the November Fed meeting called for a tightening of almost 75 basis points. Implied market expectations of where the rate will peak have also risen, with the derivative contract for the March rally trading around 4.66%. The current benchmark rate range is between 3% and 3.25%.

resolutely hawk

New York Fed Bank President John Williams said rates need to rise to around 4.5% over time, but the pace and ultimate peak of the tightening campaign will depend on how the government performs. economy. Several officials, in separate remarks this week, delivered a decidedly hawkish message that price pressures remain high and that they will not be deterred from raising rates by financial market volatility.

Former Treasury Secretary Lawrence Summers said it was important the Fed stuck to the new monetary tightening it signaled, even in the face of financial risks stemming from its actions.

All eyes will now be on next week’s US inflation data after a warmer-than-expected reading in August dampened hopes of an incipient slowdown. Moreover, the minutes of the Fed’s September meeting will give clues to the central bank’s tolerance for economic difficulties.

Amid fears of a looming recession, investors have poured in the most cash since April 2020, but stocks could see further declines as they don’t fully reflect that risk, Bank of America Corp strategists say. . Their report cites data from EPFR Global showing that cash funds received nearly $89bn in the week to October 5 – while investors withdrew $3.3bn from equity funds global.

Wall Street is “rebelling against” policy tightening, strategists led by Michael Hartnett wrote ahead of the labor market report.

From a technical standpoint, the fact that the S&P 500 remains sufficiently oversold alongside bearish sentiment could warrant “further rally efforts” that could materialize as early as next week, according to Janney Montgomery Scott’s Dan Wantrobski.

“The data reported alongside our proprietary cycle work to date gives us confidence that we are on track to further anticipate a ‘U’ shaped market bottom and recovery in the months ahead (up to in 2023),” he added. “We believe the bottom will be established at some point in the coming weeks/months – but for now investors should continue to expect a very choppy trajectory due to a significant macro overhang.”

More job comments:

Jeffrey Roach, Chief Economist at LPL Financial:

“In a word: ‘frustrating.’ As long as job gains are strong, markets should expect aggressive rate hikes from the Federal Reserve.

Michael Shaoul, Managing Director of Marketfield Asset Management:

“This report should keep expectations of any ‘dovish pivot’ at bay and underscores our concerns that any policy shifts are much more likely to be driven by financial market conditions far worse than a soft landing in the underlying US economy.”

Shawn Cruz, Chief Strategist at TD Ameritrade:

“The market has adopted a ‘bad news is good news’ mentality and there really isn’t any bad news in this report. It’s a strong jobs report, but it’s not what the market wants to see because it doesn’t give the Fed a reason to pause or back away from its hawkish intentions.

Ronald Temple, managing director at Lazard Asset Management:

“As job growth slows, the U.S. economy remains far too hot for the Fed to meet its inflation target. The path to a soft landing is getting harder and harder. If any doves remain at the FOMC, today’s report might have further thinned their ranks.

Seema Shah, strategist at Principal Global Investors:

“Today’s jobs issue is hawkish reading. With the Fed’s dot chart showing policy rates closer to 5% than 4% next year, we have a market that wants the economy to slow quickly. That’s when you know there’s only one way forward: risky assets have to go down further.”

Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets:

“On the net, this was a strong enough reading to hold a 75 bp rise in November as the path of least resistance, but decelerating year-on-year wage growth adds to the case for a slower pace of rise at 50 bp in December, and we still expect the last 25 bps hike in February to reach the terminal.

Some of the major movements in the markets:

Shares

  • The S&P 500 fell 2.8% at 4 p.m. PT

  • The Nasdaq 100 fell 3.9%

  • The Dow Jones Industrial Average fell 2.1%

  • The MSCI World index fell 2.4%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4%

  • The euro fell 0.5% to $0.9739

  • The British pound fell 0.7% to $1.1080

  • The Japanese yen fell 0.2% to 145.36 per dollar

Cryptocurrencies

  • Bitcoin fell 2.9% to $19,461.43

  • Ether fell 2.7% to $1,327.55

Obligations

  • The yield on 10-year Treasury bills rose six basis points to 3.89%

  • The German 10-year rate rose 11 basis points to 2.19%

  • The UK 10-year yield rose seven basis points to 4.24%

Goods

  • West Texas Intermediate crude rose 4.6% to $92.48 a barrel

  • Gold futures fell 1% to $1,703 an ounce

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