U.S. stocks slumped to the lowest levels in nearly two months Thursday, while the dollar extended gains and Treasury yields hit fresh multi-year highs, as markets around the world reacted to seemingly hawkish signals from the Federal Reserve after it kept rates steady late Wednesday but indicated the need for at least one more increase between now and the end of the year.
Stocks were heaped with further downward pressure following another big decline in weekly jobless applications, which fell to a mid-January low of 201,000 over the period ending on September 16, suggesting ongoing strength in the labor market.
Federal Reserve Chairman Jerome Powell appeared cautious during his question-and-answer session with the media in Washington Wednesday as he suggested that while inflation pressures were undoubtedly easing, as evidenced by a pullback in forecasts from the Fed's 'Summary of Economic Projections', the economy and the labor market continue to outperform, putting the need for another rate hike squarely on the table.
"The fact that we decided to maintain the policy rate at this meeting doesn’t mean that we’ve decided that we have or have not at this time reached that stance of monetary policy that we’re seeking," Powell told reporters. "We want to see convincing evidence that we have reached the appropriate level (and) we need to see more progress before we’ll be willing to reach that conclusion."
Markets odds of a November rate hike remain subdued, however, falling to around 26.3% following Powell's address, according to the CME Group's FedWatch tool. The chance of a December increase, which would take the Fed Funds rate to between 5.5% and 5.75%, were pegged modestly higher at 38.4%, with bets on a half a percentage point hike emerging as well.
For 2024, the Fed sees only 50 basis points, or half a percentage point, in potential rate cuts, down from the full percent indicated in the June projections.
"The decrease in the number of cuts in 2024 is one of the more telling changes this month. It means (combined with the increase in growth expectations and cut in unemployment rate for that year) that the Fed is increasingly confident that they can pull off a soft landing and that the economy can withstand higher rates for longer," said Andrew Patterson, senior economist at Vanguard.
Bond market reaction, however, was more emphatic, with benchmark 2-year Treasury yields rising to a fresh 2007 high of 5.191% before easing to 5.140% in afternoon New York trading, reflecting the higher rate projections gleaned from the Fed's dot plots.
Benchmark 10-year notes moved to a new cycle high of 4.478%.
The U.S. dollar index, meanwhile, was marked 0.20% higher against a basket of six global currencies in overnight trading at 105.328.
The 'higher-for-longer' rate forecasts pressured global stocks Thursday, with Japan's Nikkei 225 closing 0.8% lower and the region-wide Asia ex-Japan index giving back 1.6%.
In Europe, the Stoxx 600 was marked 1.05% lower while the FTSE 100 slipped 0.5% following the Bank of England rate decision, which saw MPC hold it key policy rate unchanged at 5.25%.
Heading into the final hour of the trading day on Wall Street, the S&P 500, which is down 2.3% for the month, was marked 60 points, or 1.37% lower while the Dow Jones Industrial Average fell 275 points.
Higher Treasury bond yields and poor post-IPO performances for both ARM Holdings and Instacart have the tech-focused Nasdaq down 206 points, or 1.53%.
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