Stocks Sink as Stagflation Specter Haunts Trading: Markets Wrap

(Bloomberg) -- The surge in stocks that followed this week's Federal Reserve decision proved short lived, with traders worried that officials could struggle to fight persistently high inflation amid the lingering threat of an economic recession.

More than 95% of the companies in the S&P 500 fell on Thursday, with the benchmark halting a three-day advance. The tech-heavy Nasdaq 100 underperformed major equity gauges, tumbling almost 5%. The dollar rallied. A selloff in long-end Treasuries pushed yields to multi-year highs, with the 10-year rate jumping above 3%. Short-end yields also rose, albeit by less.

The swing higher in long-dated yields matters for the broad economy as they influence borrowing costs for companies and home owners. Mortgage rates in the U.S. resumed their upward climb, reaching the highest level since August 2009. The average for a 30-year loan climbed to 5.27% from 5.10% last week, Freddie Mac said in a statement.

By pushing back on a jumbo-hike of 75 basis points in June, Fed Chair Jerome Powell beat back the market's most-aggressive predictions for the path of interest rates on Wednesday. However, he may also have inadvertently set the stage for more turbulence going forward. It's still a very rocky road ahead, with pivotal economic data and global developments due within days that could seed doubts about the central bank's approach.

Comments:

“We were surprised that he seemed to rule out a 75 bp hike as we believe the Fed should always keep all options open,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman, referring to Powell. “Make no mistake, the Fed is in the early stages of what we believe will be a very aggressive tightening cycle.”
“There was nothing dovish about the message from the FOMC,” wrote Michael Shaoul, chief executive officer at Marketfield Asset Management, referring to the Federal Open Market Committee. “Even so, the delivery of the certainty of a 50 bp hike acted as a catalyst for a violent unwinding of crowded positions.”
“Investors have a ton to chew on, so while we may see some short-term volatility, keep in mind it's natural to see ebbs and flows in the market as we enter a new era of monetary policy,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley.

U.S. productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labor costs surged and illustrated an extremely tight job market. Separate figures showed applications for state unemployment benefits climbed to 200,000 last week from 181,000. The data precede the government's monthly jobs report on Friday, which is currently forecast to show payrolls increased by 380,000 in April.

Corporate Highlights:

Shares of e-commerce companies from Etsy Inc. to Shopify Inc. tumbled after weaker-than-expected quarterly earnings and forecasts deepened concern that the pace of online shopping has slowed.
EBay Inc. gave a lackluster sales and profit outlook for the current quarter, accelerating its decline from the peaks reached when shoppers were stuck at home during the pandemic.
Elon Musk has secured about $7.1 billion of new financing commitments, including from billionaire Larry Ellison, a Saudi Prince, and Sequoia Capital, to help fund his proposed $44 billion takeover of Twitter Inc.

Elsewhere, the pound slumped as investors looked past the Bank of England's rate increase and turned their focus on forecasts for a recession in 2023.

Key events this week: