Stock Mood Turns Ugly as Slowdown Fears Surface: Markets Wrap

(Bloomberg) -- US stocks ended the day just off session lows after weak economic data rekindled concern over the outlook for growth and corporate earnings. Treasuries rallied, while the dollar rebounded on deteriorating risk sentiment.

The S&P 500 fell 1.6%, the worst decline in a month, while the tech-heavy Nasdaq 100 snapped a seven-day rally, after reversing gains of more than 1%. Earlier, stocks rallied as Treasury yields fell across the curve on bets weak data would prompt the Federal Reserve to downshift its tightening policy. Two Fed officials, however, repeated calls for more hikes even after further signs the economy was softening and inflation cooling.

Producer prices slid by the most since the start of the pandemic, and retail sales fell by the most in a year, according to reports released Wednesday. Meanwhile, business equipment production slumped, with a decline in factory output wrapping up the weakest quarter for manufacturing since the onset of the pandemic. A consumer losing steam and business investment falling heightened concern the economy may be moving closer to recession.

In corporate news, Microsoft Corp. said it plans to cut 10,000 jobs, taking steps to cope with an increasingly bleak outlook. Bank of America Corp. started telling executives to pause hiring except for the most vital positions. Crypto firm Genesis Global Capital is said to be laying the groundwork for a bankruptcy filing.

Read more: Microsoft-Amazon Cuts to Erase 28,000 Jobs as Tech Slump Deepens

“While risk assets have had a positive start to 2023, with investors encouraged by signs of fading inflation and a swift reopening in China, it remains possible that the rally is a ‘head fake,’ and that economic data will ultimately disappoint,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote. “The lagged effect of higher rates could represent a greater drag on growth than expected.”

Treasuries rose across the curve, with the 10-year yield dropping 18 basis points to 3.37% in afternoon trading. Money markets boosted bets on policy easing, betting the Fed rate will peak just below 4.9%, compared with the current band of 4.25% to 4.5%.

Read: Federated’s Gallo Says Return of ‘Typical’ Recession Helps Bonds

While markets price in a step down in the rate-hiking cycle, two closely followed Fed hawks repeated calls for more increases. St. Louis Fed President James Bullard said policy is “almost” in restrictive territory but not quite. 

Policy has to stay on the “tighter side in 2023,” Bullard said in an online Wall Street Journal interview, noting that he penciled in a forecast for a rate range of 5.25% to 5.5% by the end of this year in the Fed’s dot plot of projections.

Cleveland Fed President Loretta Mester said in an interview with The Associated Press published Wednesday that the Fed needs “keep going” but didn’t say how big a rate increase she favored when officials meet Jan. 31-Feb. 1. Philadelphia Fed chief Patrick Harker repeated his view of lifting interest rates in quarter-point increments “going forward.”

The survey in the latest Fed’s Beige Book indicated the pace of price increases had slowed in many districts and price growth was expected to moderate further in the year ahead.

“We expect 2023 to slowly see a shift of the market worrying about inflation to worrying about the economy, which is more of a ‘hard landing’ narrative,” said Jonathan Krinsky, chief market technician for BTIG. “Should we close lower today, and should tech/growth underperform despite the meaningful move lower in nominal and real rates, we could be in the early innings of the handoff from the Fed to the economy.”

Read: Heavily Cut Estimates Don’t Reflect Full Gloom: Earnings Watch

The yen dropped as much as 2.6% against the dollar after the Bank of Japan doubled down on defending their stimulus, defying intense market speculation. The currency later traded down 0.5%.

Key events this week:

• US housing starts, initial jobless claims, Philadelphia Fed index, Thursday
• ECB account of its December policy meeting and President Christine Lagarde on a panel in Davos, Thursday
• Fed speakers include Susan Collins and John Williams, Thursday
• Japan CPI, Friday
• China loan prime rates, Friday
• US existing home sales, Friday
• IMF’s Kristalina Georgieva and ECB’s Lagarde speak in Davos, Friday

Here are some of the main market moves:

Stocks

• The S&P 500 fell 1.6% as of 4 p.m. New York time
• The Nasdaq 100 fell 1.3%
• The Dow Jones Industrial Average fell 1.8%
• The MSCI World index fell 0.9%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro was little changed at $1.0790
• The British pound rose 0.4% to $1.2338
• The Japanese yen fell 0.6% to 128.88 per dollar

Cryptocurrencies

• Bitcoin fell 2.8% to $20,722.46
• Ether fell 3.8% to $1,520.25

Bonds

• The yield on 10-year Treasuries declined 18 basis points to 3.37%
• Germany’s 10-year yield declined seven basis points to 2.02%
• Britain’s 10-year yield declined one basis point to 3.31%

Commodities

• West Texas Intermediate crude fell 1.2% to $79.22 a barrel
• Gold futures fell 0.2% to $1,905.50 an ounce

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