Major U.S. stock indexes rose as 10-year Treasury yields rose to their highest levels since the 2008 financial crisis, as markets believed the Federal Reserve would raise interest rates sharply this week to curb decades of scorching inflation, while meeting the latest economic forecasts. Tuesday (20th) opened lower, in which the Dow Jones Industrial Average fell more than 350 points.
Before the deadline, the Dow Jones Industrial Average fell more than 350 points or 1.22%, the Nasdaq Composite fell more than 100 points or 0.92%, the S&P 500 fell more than 1%, and the Philadelphia Semiconductor Index fell nearly 1%.
U.S. stock index futures pared earlier gains before the U.S. market opened and fell as traders braced for another big U.S. interest rate hike. Markets are increasingly concerned that the Federal Reserve (Fed) may over-tighten monetary policy, raising the prospect of a hard landing for the economy. Meanwhile, the dollar rallied on safe-haven demand, trading at 109.865 by press time.
Futures on the tech-heavy, interest-rate Nasdaq 100 index fell 0.5%, underperforming S&P 500 futures. In other stocks, in premarket trading, shares of Ford Motor slumped after it announced its third-quarter profit forecast, with market analysts worried about the impact of rising costs.
The U.S. central bank begins its monetary policy meeting today and will announce its interest rate decision and economic forecast summary at 2:00 a.m. Taiwan time on Thursday (22nd). 4% and then pause rate hikes.
The Fed’s long-term strategy is seen as avoiding the disastrous “stop-and-go” policy of the 1970s that sent inflation out of control. Investors lowered expectations for a bigger rate hike by the Fed, with only two of 96 economists polled by Bloomberg now forecasting a 4-yard (100 basis point) rate hike.
In bonds, the 10-year U.S. Treasury yield rose above 3.5 percent, while the more sensitive two-year yield hit its highest level since 2007 and was on track to top 4 percent, reflecting investor fears of a hard landing.
Meanwhile, in another worrying trend for U.S. stocks, real interest rates (inflation-adjusted Treasury yields) rose to their highest levels since 2007. It was a key factor driving risk assets higher when real interest rates were fixed in negative territory during a decade of easy monetary policy.
U.S. profits have been cut more than they have been raised in the past 15 weeks, according to a Citigroup indicator, and strategists at Morgan Stanley and Goldman Sachs have warned that risks to earnings and stock valuations are growing.
As of 21:00 on Tuesday (20th) Taipei time:
Today’s key economic data:
- The US August operating license monthly rate was reported at – 10%, expected – 4.5%, the previous value – 0.6%
- The initial value of the annualized total number of building permits in the United States in August reported 1.517 million units, the expected 1.61 million units, and the previous value of 1.685 million units
- The annualized monthly rate of new housing starts in the United States in August was 12.2%, expected 0.3%, the previous value – 10.9%
- The annualized total of new housing starts in the United States in August reported 1.575 million units, expected 1.445 million units, and the previous value of 1.404 million units
Stocks in focus:
Ford Motor (F-US) fell 9.11% to $13.57 a share in early trade
Ford Motor warned investors that costs could increase by an additional $1 billion in the third quarter due to inflation and supply chain problems. The company said the supply issue has resulted in a shortage of components affecting about 40,000 to 45,000 vehicles, mostly higher-margin trucks and SUVs, that could not be delivered to dealers because of the shortage. In addition, Ford cited inflation as one of the reasons for the $1 billion higher cost than originally estimated.
Nike (NKE-US) fell 4.19% in early trade to $102.72 per share
Nike U.S. stocks fell 2.2% in premarket trading after Barclays downgraded Nike stock from “overweight” to “equal weight”, noting that Nike’s market in China will continue to fluctuate, while North America and other Regional demand weakened.
Witton Electronics (WDC-US) fell 3.71% to $35.26 a share in early trade
Witton Electronics fell 1.7 percent in premarket trading after Deutsche Bank downgraded its stock to “Hold” from “Buy”, saying its profit and revenue were hurt by deteriorating demand. Possibly at the lower end of the financial forecast.
Wall Street Analysis:
Danielle DiMartino Booth, chief strategist and chief strategist at Quill Intelligence, said the Fed could tighten policy on the brink of a recession. “The stock market’s reliance on Fed easing during the downturn may be exactly what Chairman Powell wants to eliminate by raising interest rates aggressively, in addition to inflation,” he said.
Global tightening of monetary policy will increase headwinds for risk assets as central banks deliberately try to slow aggregate demand, ING Group said. In addition, the group’s analysts believe that there seems to be no reason for the Fed to soften the hawkish stance it recently showed at the annual meeting of the central bank in Jackson Hole, predicting that the dollar will remain flat ahead of the Federal Open Market Committee (FOMC) meeting.
Luca Paolini, chief strategist at Pictet Asset Management, said the Fed is likely to slow the pace of rate hikes next year and said rates could peak next year, before the market focus will turn to how the rate hikes affect the economy and corporate earnings. He believes that he has not yet seen a significant reduction in corporate revenue, but it will happen in the foreseeable future. He also noted that bonds have limited downside and an inverted yield curve has historically been a red flag to buy stocks.