(Bloomberg) — Stocks finished lower as data showing a solid US labor market bolstered speculation that Federal Reserve policy could remain aggressively tight even with the threat of a recession.
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At a time when good news is considered bad news when it comes to policy conjectures, the S&P 500 wiped out a rally as the figures highlighted an unexpected rebound in US job openings, which may keep the pressure on the Fed. It was the 26th time in 2022 that the equity gauge erased a gain or loss of at least 1% in one session — the most for any year since the financial crisis.
Big tech weighed on equities, with Apple Inc. down almost 2% and Amazon.com Inc.’s value ending below $1 trillion for the first time since 2020. After the close, Advanced Micro Devices Inc. topped earnings estimates and signaled that inroads in the lucrative server chip market will continue to bolster its finances. The Dow Jones Industrial Average traded near a resistance level that saw the index halt a few rally attempts in the past few months.
Two-year US yields — which are more sensitive to imminent Fed moves — topped 4.5% after sliding as much as eight basis points earlier in the day.
“Hopes for a Fed dovish pivot are misplaced if today’s job openings are any guide,” said Ronald Temple, head of US equity at Lazard Asset Management. “Despite other signs of economic deceleration, the job openings data taken together with nonfarm payroll growth indicate the Fed is far from the point where it can declare victory over inflation and lift its foot off the economic brake.”
Friday’s jobs report is currently forecast to show US employers added about 196,000 workers to payrolls in October. Economists are expecting the unemployment rate to edge up to 3.6%, and for average hourly earnings to post another solid advance.
Former Treasury Secretary Larry Summers said in a tweet that the “growing chorus” for the Fed to pause interest rate hikes very soon is “badly misguided.” He added that this is “consensus of economists who have a track record, since COVID, of being dismally wrong on inflation.” Summers also noted that the Fed should “stay on the current course and then evaluate things.”
To Matt Maley at Miller Tabak + Co., a lot of what will take place in markets over the next few weeks will hinge upon Powell’s signals on Wednesday as well as the subsequent Fedspeak. Tom Porcelli at RBC Capital Markets says that if the Fed’s boss really wants to transition to shallower hikes, he should maintain some element of hawkishness as there’s a “decent risk of creating confusion.”
“As we have not yet reached the peak for Fed rate hikes, it’s highly unlikely that we’ve already seen the bottom of this bear market, especially given the history of Fed rate hikes peaking before the market troughs,” noted Seema Shah, chief global strategist at Principal Asset Management. She anticipates the market floor for this cycle will most likely be reached in the first or second quarters of 2023.
For now, Shah sees both market and inflation volatility persisting alongside further Fed rate hikes in the last few months of 2002 and into early next year.
Lauren Goodwin at New York Life Investments says she believes the Fed may pause its rate hikes soon even amid strong inflation. Financial conditions have tightened substantially, and recession should be considered a base case, she added.
“Let me be clear — a Fed pause is not the same as a pivot,” Goodwin added. “Certainly, deteriorating economic and credit conditions could cause the Fed to pivot modestly at some point, but a full pivot into accommodative territory is highly unlikely in the next year.”
Also weighing on market sentiment was a report showing US manufacturing neared stagnation in October as orders contracted for the fourth time in five months, while an index of prices paid fell to a more than two-year low. The figures added to evidence of recession concerns as central banks step up the fight to get inflation under control.
Earlier in the day, speculation that China is preparing to gradually exit the stringent Covid Zero stance helped boost equities. A gauge of the nation’s stocks listed in Hong Kong surged almost 7% intraday. Shares pared gains after Chinese Foreign Ministry spokesman Zhao Lijian said he’s “not aware” of a committee on ending the policy.
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Key events this week:
EIA crude oil inventory report, Wednesday
Federal Reserve rate decision, Wednesday
US MBA mortgage applications, ADP employment, Wednesday
Bank of England rate decision, Thursday
US factory orders, durable goods, trade, initial jobless claims, ISM services index, Thursday
ECB President Christine Lagarde speaks, Thursday
US nonfarm payrolls, unemployment, Friday
Some of the main moves in markets:
The S&P 500 fell 0.4% as of 4 p.m. New York time
The Nasdaq 100 fell 1%
The Dow Jones Industrial Average fell 0.3%
The MSCI World index rose 0.2%
The Bloomberg Dollar Spot Index fell 0.2%
The euro was little changed at $0.9878
The British pound rose 0.1% to $1.1483
The Japanese yen rose 0.3% to 148.19 per dollar
Bitcoin rose 0.2% to $20,445.94
Ether rose 0.7% to $1,576.28
The yield on 10-year Treasuries was little changed at 4.05%
Germany’s 10-year yield declined one basis point to 2.13%
Britain’s 10-year yield declined five basis points to 3.47%
West Texas Intermediate crude rose 2% to $88.27 a barrel
Gold futures rose 0.6% to $1,651.30 an ounce
–With assistance from Vildana Hajric, Elaine Chen, Isabelle Lee and Emily Graffeo.
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