Stocks on Wall Street were headed for their worst week in nearly four months in the wake of comments from Fed policy makers that the US central bank was well aware of emerging inflationary pressures.
The benchmark S&P 500 fell 1 percent on Friday, taking its losses for the week to 1.6 percent. Nearly 90 percent of stocks in the blue-chip index were lower on the day, including shares of major banks and major US oil companies.
Investors have moved on from some of their most popular trades of the year, including an earlier push into shares of smaller companies seen as particularly sensitive to economic growth. The Russell 2000 index of small businesses was on track for its biggest weekly loss since late January, dropping 3.7 percent.
I followed the moves Comments From Jay Powell, Federal Reserve Chairman, on Wednesday that investors took a cue that the US central bank would tame inflation and that policy makers were not just focused on helping the country’s hard-hit labor market.
Federal Reserve policymakers on Wednesday projected that interest rates would rise from record lows in 2023, than their previous forecast for 2024. This view gained further momentum after an interview with James Bullard, Federal Reserve Chairman in St. CNBC Television Friday. He said that the first rate hike could come next year.
The shift has been shaken by federal policy makers The so-called deflation tradeInstead, it helped boost technology stocks that have lost steam this year. While the heavy Nasdaq Composite fell 0.7 percent on Friday, it was set to end the week down less than 0.1 percent.
Inflation expectations were lowered significantly this week as investors digested the Fed’s latest decision. George Saravelos, a strategist at Deutsche Bank, noted that changing inflation and growth expectations “are in line with the continued resilience of stocks, particularly in growth stocks,” as lower bond yields make the value of future earnings more attractive.
He added that the fact that volatility in financial markets is “driven by the massive relative rotation from Russell to Nasdaq should not come as a surprise.” Saravelos compared it to the market between 2010 and 2019, when valuations of developing stocks rose on the back of moderate or low growth and low inflation.
The decline in stocks was accompanied by a rise in the prices of long-term US government bonds on Friday as investors viewed early expectations of an expected rate hike in the US as a signal that the central bank is ready to control inflation.
The yield on the benchmark 10-year US Treasury bond, which moves inversely with its price, fell 0.06 percentage point at 1.44 percent.
That yield has risen from about 0.9 percent at the start of the year, but has eased in recent months as investors have begun to look at it. leaps In the US inflation as temporary. Persistent inflation erodes the fixed interest yields on bonds.
“The story of the bond market has changed on a whim,” said Tatjana Grill-Castro, co-head of public markets at credit investor Muzinic. We had this idea first [coming out of the Covid-19 crisis] Inflation will always be high. Then the story was that this was higher and [inflation] It will go down, and I think the story is constantly changing because we don’t know yet.”
The dollar was also on track for its best week since last September as yields on short-term Treasuries rose, with higher prices expected ahead. The dollar index, which measures the greenback against major currencies, rose 0.4 percent on Friday, bringing its weekly gain to 1.8 percent.
Gold, which is priced in dollars and often moves inversely to the US currency, was trading at $1,773 an ounce on Friday – a drop of nearly 6 percent since Monday in its biggest weekly drop since March 2020.
“Because of the upbeat surprise to the rate hike expectations that were presented, I saw a very strong movement in the dollar,” said Keith Palmer, multi-asset portfolio manager at BMO Global Asset Management. “Most of the market was bearish dollar ahead of this meeting,” he said, as traders previously expected the Fed to keep monetary policy very loose.