Capping a week of turmoil on Wall Street, the stock on Friday had its biggest daily drop in a month, as investors struggled to check their expectations for inflation and interest rates.
The S&P 500 fell 1.3 percent, its biggest drop since May 12 and a decline that emerged as the index made only small moves in the past month.
It was the fourth consecutive daily decline for the index, bringing the S&P 500’s loss to 1.9 percent for the week. This is its worst performance since the end of February.
Wall Street’s focus this week was on the Federal Reserve and the potential for increase in interest rates Or take other steps to reduce your emergency support for the economy. The central bank said on Wednesday it had no immediate plans to change the policy, but issued projections that showed most officials expected interest rate hikes to begin in 2023.
On Friday morning, James Bullard, President of the Federal Reserve Bank of St. said on CNBC That it may be appropriate for the Fed to raise interest rates at the end of 2022. Mr. Bullard does not have a vote on monetary policy this year, but he will be a voting member of the Fed’s policy committee in 2022.
He is not in the Fed’s majority: the so-called dot plot of central bank rate projections suggested that 11 out of 18 central bank officials expected next year to be near zero.
Still, traders heeded Bullard’s comments, and yields on government bonds, which are the basis for the economy’s cost of borrowing, jumped briefly on Friday. By noon, however, they were sharply lower, with the yield on the 10-year Treasury notes falling to 1.44 percent.
The Fed also clarified this week that officials were starting to talk about a plan to slow its bond purchases, the first baby step away from the emergency aid the economy is providing. Mr Bullard’s comments on Friday underscore that change.
It may seem counterintuitive that long-term bond yields will decline with Fed officials floating the possibility that they will raise interest rates. But similar dynamics unfolded in the years following the financial crisis.
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In 2010, as the Fed attempted to dial down bond-buying programs to help the economy recover from the financial crisis, bond yields fell sharply along with the stock market. it was only when Ben Bernanke, then chairman of the Fed, hinted That a second round of bond-buying was on the way saw a reversal in the markets and a rise in stock and bond yields.
On Friday, the chatter of analysts and traders focused on a sharp unwinding in recent days of the so-called reflation trade – based on a continued continuation of support from the Fed – that had driven stocks and commodities higher in early 2021 . Such investments, often referred to as cyclical assets, tend to increase in value as the business cycle gains momentum.
“Powell, with the help of St. Louis Fed Chairman Bullard, has broken the spirits of the reflation crowd today,” analysts at Strategus Research wrote in a note Friday, referring to Fed Chairman Jerome H. Powell. “So the rally in cyclical assets (including inflation-protected bonds) will have to take some relief.”
Gold and copper, which were down this week, continued to decline following Mr Bullard’s comments. Lumber prices, which had soared amid a pandemic-breed boom in home improvement and residential construction, continued to decline. The dollar went up.
Analysts were unsure whether the recent drop in commodity and stock prices – which can be seen as a sign that investors are expecting a weaker pace of growth than previously – was a signal being sent from the Fed to move. or if it was a fundamental downgrade of investor expectations for an economic recovery.
Analysts at JPMorgan wrote in a note to clients on Friday, “We will have to monitor those trends carefully to see if this is a position-driven event and something that will eventually become alert, or a converting There will be a longer iteration for the cyclical approach.” .
Not all shares suffered losses. Companies in industries that benefit from lower interest rates — such as homebuilders — rose. Lenar jumped 3.7 percent after reporting better-than-expected revenue and profits on Thursday. DR Horton rose 1.2 per cent.
And fast-growing technology firms — which tend to do well when interest rates fall — also did well. Tesla rose 1.1 percent. DocuSign — a technology firm closely tied to the mortgage and real estate markets — rose 5.3 percent. Cybersecurity firm CrowdStrike rose 1.5 percent.
Oil prices eased the decline in commodities, riding on expectations of rising demand as the global economic recovery spread from the United States to Europe and emerging market countries. US benchmark crude West Texas Intermediate rose 0.8 per cent.
Mohamed Hadik contributed to this report.