U.S. Stocks See Further Downside Amid Worries About Monetary Policy

Stocks moved mostly lower during trading on Wednesday, extending the significant downward move seen in the previous session. The major averages all moved to the downside, with the tech-heavy Nasdaq showing another particularly steep drop.

After tumbling by 2.3 percent during trading on Tuesday, the Nasdaq plunged 315.35 points or 2.2 percent to 13,888.82. The S&P 500 also slumped 43.97 points or 1 percent to 4,481.15, while the narrower Dow posted a more modest loss, falling 144.67 points or 0.4 percent to 34,496.51.

Worries about the outlook for monetary policy continued to weigh on Wall Street amid concerns the Federal Reserve plans to tighten monetary policy more aggressively than previously anticipated.

Fed Governor Lael Brainard’s comments from Tuesday continued to generate selling pressure, as she predicted the Fed would start reducing its balance sheet at a “rapid pace” as soon as the May meeting.

Philadelphia Fed President Patrick Harker also weighed in on the outlook for monetary policy in remarks to the Delaware State Chamber of Commerce.

Harker said he is “acutely concerned” about the elevated rate of inflation and forecast a series of “deliberate, methodical” interest rate hikes this year.

Stocks fluctuated late in the session after the Fed released the minutes of its March meeting, which showed that the meeting featured a continued discussion about reducing the size of the central bank’s balance sheet.

Staff presented a range of possible options for reducing the Fed’s securities holdings over time in a predictable manner, with all of the options featuring a more rapid pace of balance sheet runoff than in 2017-2019.

The Fed said participants generally agreed reducing the central bank’s holdings by about $95 billion per month would likely be appropriate, reflecting monthly caps of about $60 billion for Treasury securities and about $35 billion for agency mortgage-backed securities.

The minutes showed that there was also general agreement that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.

Participants agreed reducing the size of the Fed’s balance sheet would play an important role in firming the stance of monetary policy and that the process could begin as soon as the next meeting in May.

Paul Ashworth, Chief U.S. Economist at Capital Economics, noted the balance sheet reduction outlined in the minutes is double the pace of the run-off between 2017 and 2019 but said it is still a “little smaller than we were expecting, particularly in light of the more hawkish post-meeting comments from various officials.”

At the March meeting, the Fed announced its widely expected decision to raise interest by 25 basis points to a range of 0.25 to 0.5 percent, marking the first rate hike since December 2018.

The minutes showed many participants would have preferred a 50 basis point increase due to rate of inflation being well above the Fed’s objective and facing risks to the upside.

However, a number of these participants felt a 25 basis point increase would be appropriate in light of the greater near-term uncertainty associated with Russia’s invasion of Ukraine.

Many participants noted that one or more 50 basis point increases could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified, the Fed said.

The Fed’s next monetary policy meeting scheduled for May 3-4, with CME Group’s FedWatch Tool currently indicating a 78.8 percent chance of a 50 basis point rate hike.

The continued weakness on Wall Street also comes amid concerns about the impact of additional sanctions against Russia.

Citing Russian atrocities in Ukraine, the White House announced a ban on new investment in Russia, severe financial sanctions on Russia’s largest bank and sanctions on Russian elites and their family members, including President Vladimir Putin’s adult children

Sector News

Airline stocks turned some of the market’s worst performances on the day, resulting in a 3.5 percent nosedive by the NYSE Arca Airline Index.

Shares of JetBlue (JBLU) moved sharply lower after Spirit Airlines (SAVE) said it has received a $3.6 billion cash takeover offer from the discount airline.

Spirit previously agreed to be acquired by Frontier Airlines parent Frontier Group (ULCC), which also posted a steep loss on the day.

Considerable weakness was also visible among brokerage stocks, as reflected by the 3.1 percent slump by the NYSE Arca Broker/Dealer Index.

Networking stocks also showed a significant move to the downside on the day, dragging the NYSE Arca Networking Index down by 2.7 percent.

Semiconductor, housing and computer hardware stocks also saw notable weakness, while pharmaceutical and utilities stocks bucked the downtrend.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Wednesday. Japan’s Nikkei 225 Index slumped by 1.6 percent, while Hong Kong’s Hang Seng Index tumbled by 1.9 percent.

The major European markets also moved to the downside on the day. While the U.K.’s FTSE 100 Index dipped by 0.3 percent, the German DAX Index and the French CAC 40 Index plunged by 1.9 percent and 2.2 percent, respectively.

In the bond market, treasuries extended the notable downward move seen over the past several sessions. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, climbed 5.3 basis points to a three-year closing high of 2.609 percent.

Looking Ahead

While the outlook for monetary policy is likely to remain on investors’ minds on Thursday, traders are also likely to keep an eye on a report on weekly jobless claims.

Source: Read Full Article