U.S. stock benchmarks put in a mixed performance Thursday, with technology and other growth-oriented shares rallying, but the Dow Jones Average fell for a fourth day, after the Federal Reserve rattled the markets Wednesday by raising its forecast for inflation and signaling that it could lift benchmark interest rates sooner than had been expected.
The central bank also discussed the eventual reduction of asset purchases that had been installed to help ease financial market conditions during the pandemic.
How did stock markets trade?
The Dow Jones Industrial Average
was down 210.22 points, or 0.6%, at 33,823.45, a four-day losing streak which is the longest since January, according to Dow Jones Market Data.
The S&P 500
edged up 1.84 points, or 0.04%, to 4,221.86.
The Nasdaq Composite
jumped 121.67 points, or 0.87%, to 14,161.35.
On Wednesday, the Dow closed 265.66 points lower to end at 34,033.67, off 0.8%, falling and closing below its 50-day moving average for the first time since early March. The S&P 500 index shed 22.89 points, or 0.5%, closing at 4,223.70, while the Nasdaq Composite Index slipped 33.17 points to finish at 14,039.68.
What’s drove the market?
Big technology stocks made a comeback Thursday, pushing the Nasdaq to near a record close, as longer-term Treasury yields plunged, while commodity prices fell as the U.S. dollar strengthened, dragging down some of the Dow’s key components like Dow
On Wednesday the Fed on Wednesday tilted its outlook on inflation and interest rates and now the market needs to process what is being viewed as a slightly less accommodative stance, analysts said.
With gains led by tech and other growth stocks, which are more sensitive to rises in interest rates, it looks like investors “believe that the economy will continue to outperform in the months ahead, even if it eventually means higher interest rates,” said Fawad Razaqzada, analyst at ThinkMarkets, in a note.
“But this argument doesn’t seem right to me,” he cautioned. “I would be wary of an equally sharp drop should bond yields start moving higher again. Given the sharp dollar rally, I wouldn’t bet against rising U.S. yields. So, it is possible today’s tech rally may fade, possibly as early as later in the day. ”
U.S. Treasury yields, particularly in the belly, or middle, of the curve, jumped Wednesday following the Fed announcement. The 10-year benchmark yield
dropped 5.6 basis points, after a rise Wednesday, easing fears of an unruly selloff that could send yields sharply higher.
“Just as recent data should enable the Fed to be patient as additional economic developments unfold, we believe that interest rates within the current range, should allow investors to also be patient as they evaluate what’s next for the economy and financial markets,” wrote analysts at Janus Henderson, on Thursday.
The dollar, however, jumped, with the ICE U.S. Dollar Index
a measure of the currency against a basket of six major rivals, closed up almost 0.9%, at a two month high.
“The stage is set for what I feel is a period of somewhat higher volatility as the narrative changes and traders adjust to a future reduction in liquidity conditions,” said Chris Weston, head of research at Pepperstone, in a note. “Powell et al will make it clear that any changes will be glacial and will be communicated well in advance and there is no reason to believe we’ll see a collapse in risk sentiment.”
The Fed’s updated policy outlook signals that 13 of 18 members of the Federal Open Market Committee, or FOMC, are expecting an interest-rate increase by the end of 2023, up from 7 of 18 in March, and 11 see two or more hikes by that date. Seven of the Fed’s rate-setting committee expect to raise rates by the end of 2022, up from four in March.
“After dismissing rising inflation and inflation expectations for the past three months…it feels like the FOMC just put their hands back on the wheel,” wrote Aneta Markowska, economist at Jefferies, in a Wednesday note to clients.
During a news conference on Wednesday to discuss the FOMC’s moves, Powell advised that the so-called dot plot chart of members’ projections for interest rates should be taken with a grain of salt. However, the path forward is being taken by some as slightly more hawkish than a few months ago.
“Now, many people will think investors these days are short-term focused and would not be too concerned about the possibility of rates rising two years down the line,” wrote David Jones, Chief Market Strategist at Capital.com. “But this signal from the Fed resulted in more market volatility than has been seen for many months.”
The Fed also said it was alert to the risks of high inflation, but still believes it will be mostly short-lived. The central bank moved up its inflation outlook to a 3% annual rate in 2021 but said that would likely drop sharply by next year.
However, the Fed said that it won’t taper its monthly buying of $80 billion of Treasurys and $40 billion of mortgage-backed securities until it sees “substantial further progress” in the economic recovery.
“Taper discussions will get more serious at the July meeting,” Markowska said. That could set the stage for the Fed to hint at those plans to reduce bond buying by the time of the Jackson Hole Symposium on Aug. 26-28, some strategists speculate.
Meanwhile, first-time claims for unemployment benefits rose 37,000 to 412,000 in the week ended June 12 — the highest level in a month. Economists surveyed by The Wall Street Journal had forecast new claims to fall to a seasonally adjusted 365,000.
The Philadelphia Federal Reserve’s manufacturing index fell slightly in June.
Which companies were in focus?
- Shares of CureVac CVAC fell 38.9% on Thursday, a day after the German biotech said its COVID-19 vaccine was 47% effective in preventing the disease.
- Shares of 23andMe, the consumer genetics company that offers a home DNA test kit, began trading on Nasdaq Thursday morning, under the ticker “ME.” Shares were up 21.2%.
- Philip Morris International Inc. PM unveiled a new structure for the Americas on Thursday and named Deepak Mishra president of the region, replacing Martin King, who is retiring after 30 years. Shares were almost flat on the day.
- Shares of Commercial Metals Co. CMC closed down 3.8% after the steel and metal products company reported fiscal third-quarter profit and sales that rose above expectations, citing ‘robust’ demand given “strong” construction activity.
- Verve Therapeutics Inc. VERV, went public on Thursday, after the Massachusetts-based biotechnology company’s upsized initial public offering priced overnight above the expected range to value the company at about $832.6 million. Shares closed up 68% on the day.
- Mister Car Wash Inc. MCW, has set terms of its initial public offering, which would value the Arizona-based carwash chain at up to $5.03 billion.
Among the meme stocks, AMC Entertainment Inc.
pulled out of some midweek doldrums, closing up 10% above $60, a major target of retail traders holding the stock.
What did other markets do?
Oil futures were under pressure, with the U.S. crude benchmark
down 1.4%, while gold futures
European equities were under pressure, with the pan-Continental Stoxx Europe 600
down 0.1% and London’s FTSE 100
In Asia, the Shanghai Composite
rose 0.2%, while the Hang Seng Index
gained 0.4% and Japan’s Nikkei 225