US Stocks, Bonds Drop as Fed Signals Further Hikes: Markets Wrap

(Bloomberg) -- US stocks ended a choppy session lower after two Federal Reserve officials highlighted the central bank's resolve to be persistent until it brings inflation down meaningfully. 

The S&P 500 was down 0.9%, snapping a two-day rally. The tech-heavy Nasdaq 100 also fell. Treasury yields climbed, with the 10-year rate around 3.87%.

Fed Vice Chair Lael Brainard briefly buoyed sentiment after she said, during a Bloomberg event in Washington, that it would be appropriate “soon” for the central bank to slow its pace of interest-rate hikes. However, she also emphasized that the Fed had “additional work to do” to bring inflation down, which kept some investors on the edge. Brainard did not explicitly commit to a step-down to a half-point hike in December, nor did she elaborate what she meant by “soon.”

“I think Brainard's comments underscore the uncertainty of the path forward and the data dependence of the Committee,” said Jake Schurmeier, portfolio manager at Harbor Capital Advisors. “They don't want a slower pace of rate hikes to be confused for less restrictive policy.”

Earlier, Fed Governor Christopher Waller's hawkish comments wobbled markets as investors mulled whether the post-CPI euphoria was overblown. 

Last week's CPI-fueled rally, which propelled the S&P 500 to its best week since June, may be unsustainable, according to Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute.

“The bad news is that in an economic moment that remains so uncertain, the data is more likely than not to be messy and contradictory in the months ahead. The pace of decline will be uneven,” he said. “Moreover, there's still a long way to go to get to the Fed's target of 2% average inflation. That's why Fed governors have been lining up to talk down any market euphoria that a real pivot is in sight.” 

The cumulative impact of prior interest-rate hikes will also continue to weigh on economic growth and corporate profits, according to Mark Haefele, chief investment officer at UBS Global Wealth Management, who recommends that investors take a defensive position. 

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Meanwhile, Chinese stocks listed in the US extended their rally to a third day, after Joe Biden and Xi Jinping called for reduced tensions between the world's two biggest economies during a meeting in Bali, Indonesia. 

Key events this week:

• Fed's John Williams moderates panel, Monday
• China retail sales, industrial production, surveyed jobless, Tuesday
• Former US President Donald Trump plans to make an announcement, Tuesday
• US empire manufacturing, PPI, Tuesday
• US business inventories, cross-border investment, retail sales, industrial production, Wednesday
• Fed's John Williams, Lael Brainard and SEC Chair Gary Gensler speak, Wednesday
• ECB President Christine Lagarde speaks, Wednesday
• Eurozone CPI, Thursday
• US housing starts, initial jobless claims, Thursday
• Fed's Neel Kashkari, Loretta Mester speak, Thursday
• US Conference Board leading index, existing home sales, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.9% as of 4 p.m. New York time
• The Nasdaq 100 fell 1%
• The Dow Jones Industrial Average fell 0.6%
• The MSCI World index rose 1.8%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.1% to $1.0333
• The British pound fell 0.6% to $1.1758
• The Japanese yen fell 0.7% to 139.74 per dollar

Cryptocurrencies

• Bitcoin fell 0.7% to $16,246.64
• Ether fell 0.2% to $1,213.63

Bonds

• The yield on 10-year Treasuries advanced six basis points to 3.87%
• Germany's 10-year yield declined one basis point to 2.15%
• Britain's 10-year yield advanced one basis point to 3.37%

Commodities

• West Texas Intermediate crude fell 4.1% to $85.30 a barrel
• Gold futures rose 0.4% to $1,776.30 an ounce

This story was produced with the assistance of Bloomberg Automation.

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