US stocks pared gains a day after the worst selloff in more than two years as investors assessed prospects for growth in a rate-hiking cycle aimed at taming stubbornly high inflation. The dollar fell, while Treasury yields edged higher.
(Bloomberg) — US stocks pared gains a day after the worst selloff in more than two years as investors assessed prospects for growth in a rate-hiking cycle aimed at taming stubbornly high inflation. The dollar fell, while Treasury yields edged higher.
The S&P 500 traded little changed, after sinking more than 4% Tuesday following shock consumer-price figure that prompted investors to ratchet up wagers for interest-rate increases. Those jitters eased Wednesday after data showed producer prices fell for a second month. A gauge of the dollar retreated while the 10-year Treasury yield ticked higher after trading little changed.
While the magnitude of Tuesday’s rout was impressive, the S&P 500 only reversed most of the gains made in the previous four sessions. The lack of a surge in the VIX index — known as the “fear gauge” — suggests that the selloff was a recalibration of those expectations rather than panic selling.
“History tells us that whenever we have had a 4% one-day decline, we usually see a bounce of about 1% the day after,” Sam Stovall, chief investment strategist at CFRA Research, told Bloomberg Television’s Surveillance. “But then we sort of trade sideways for the next month before resuming an uptrend three months down the road. Investors just have to hold onto their hats right now.”
Swaps traders are now pricing in a hike of three-quarters of a percentage point when the Federal Reserve meets next week, with some wagers appearing for a full-point move. The two-year Treasury yield, the most sensitive to policy changes, rose three basis points after jumping as much as 22 basis points Tuesday, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning.
“The biggest and growing downside risk for the market is increasing recession risk as the Fed aggressively tightens into a slowing economy,” Keith Lerner, co-chief investment officer at Truist Advisory Services, said in a note. “On the other side, there is at least one partial offset: Investor expectations are low and already braced for bad news.”
More commentary
- “The narrative is still intact that inflation’s moving lower,” Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, said by phone. “If you believe the peak is in in inflation, you believe the bottom holds in June. And I do believe the peak is in in inflation.”
- “Financial conditions are biased to tighten, but PEs are much lower now vs previous financial conditions tightening periods,” Dennis DeBusschere, founder of 22V Research, wrote. “Investors are likely discounting much weaker EPS, but those negative outcomes are largely priced in. A much more aggressive Fed does increase the odds of a harder economic landing though.”
- “People with a plan don’t panic — so in days like yesterday where volatility is at extremes, good investors and good advisors are looking for opportunity,” Tom Mantione, private wealth advisor at UBS Financial Services, said on Bloomberg Radio, noting Wednesday;s PPI report was “constructive.” “I kind of think the Fed may be overdoing it here a little bit. Maybe we need to let this play out a bit.”
The Stoxx Europe 600 index slipped almost 1%, extending Tuesday’s 1.6% drop. Utilities were the among the worst-performing sectors as the European Commission considers plans to contain the energy crisis, which may include revenue caps.
The yen pulled back from a slide toward the key 145 level versus the dollar after a Nikkei report that the Bank of Japan conducted a so-called rate check with traders to see the price of the currency against the greenback. The finance minister warned he wouldn’t rule out any response if current trends continued. The country’s 10-year bond yield rose to 0.25%, the upper end of the central bank’s policy band.
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Here are some key events to watch this week:
- US business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday
- China home sales, retail sales, industrial production, fixed assets, surveyed jobless rate, Friday
- Euro area CPI, Friday
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 1:47 p.m. New York time
- The Nasdaq 100 rose 0.4%
- The Dow Jones Industrial Average fell 0.2%
- The MSCI World index fell 0.5%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.2% to $0.9993
- The British pound rose 0.6% to $1.1563
- The Japanese yen rose 1.1% to 142.99 per dollar
Bonds
- The yield on 10-year Treasuries was little changed at 3.40%
- Germany’s 10-year yield declined one basis point to 1.72%
- Britain’s 10-year yield declined four basis points to 3.13%
Commodities
- West Texas Intermediate crude rose 2.4% to $89.43 a barrel
- Gold futures fell 0.5% to $1,709.30 an ounce
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