The stock market fell on Wednesday after still strong economic data and the start of the “quantitative easing” of the Federal Reserve.
The Dow Jones Industrial Average fell 177 points, or 0.5%, while the S&P 500 fell 0.8% and the Nasdaq Composite fell 0.7%. Shares tried to rebound in the afternoon, but eventually stumbled at closing.
“US equities turned negative as expectations grew that the Fed would not cut its rate hike after … solid US economic data,” writes Edward Moya, senior market analyst at ‘Oanda.
The fall comes even after the three main indices ended in the red on Tuesday amid concerns that the new European Union plans for restrictions on Russian oil are causing oil prices to rise significantly. On Wednesday, WTI crude had risen $ 115 a barrel just minutes before the closing bell and rose more than 12 percent last month.
Markets are now pouring in various economic data, which could have implications for inflation and the Fed’s plans to raise interest rates.
The last was the manufacturing index of the Institute for Supply Management. It stood at 56.1 in May, compared to 55.4 in April, with any reading above 50 representing growth in activity. New orders grew, suggesting that manufacturers expect strong demand even with rising interest rates, writes Citigroup economist Andrew Hollenhorst.
The hot manufacturing figure could easily predict that inflation will remain fairly high, which in turn could mean that the Fed is sticking to its plan to raise interest rates much faster than it has normally done. the last few years.
In terms of employment, job vacancies remained near record levels in April, with 11.4 million jobs open, the Department of Labor said on Wednesday. Recently, there have been about 1.9 places for each unemployed person, according to 22V Research. This is the kind of dynamic market they want to see disappear. Companies, eager to hire, have to pay higher wages, which forces them to raise prices, contributing to general inflation.
The bond market was not very kind to both data. The 2-year Treasury yield, which is trying to predict the level of the federal funds rate a couple of years from now, had risen to 2.65% minutes before the bell, a level at which no has gone up in a couple of weeks. .
There is more data to come. Unemployment applications must be submitted on Thursday, followed by the May employment report on Friday. Economists are looking for 328,000 jobs to be added, which would be below the 428,000 jobs added in April. Markets want to see a strong number of jobs, which indicates a strong but not too strong economy, which would be a sign that the Fed still needs to do more to curb the economy to fight inflation. A figure too far ahead of expectations could also point to even higher inflation, as more people would have income and expenses.
This has been a focal point for the market recently. The latest inflation data show that the pace of rising prices has slowed, to the delight of the stock market, as this indicates that the Fed could soon slow down the rate of rise in interest rates. Now the markets, and the Fed, have to see continuous evidence that inflation will not stay too high.
This evidence has not appeared this week, and the market may be preparing for some negative news in this regard, as stocks have rebounded in recent weeks. The S&P 500 is up about 8% from its intraday low on May 20.
“May is finally over, but worries about inflation, war and high energy prices welcome the new month with us,” wrote Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
In line with high inflation, the Fed is starting to reduce its balance sheet today. In a process called quantitative easing, the Fed will not reinvest established amounts of interest income in the bond market. Less money moving into bonds lowers their prices and increases their returns, making them more attractive to investors. Already, the 10-year Treasury yield rose to 2.93%, from 1.51% at the end of 2021, which has contributed in part to the fall in stocks this year.
The good news is that the bond market may have already reflected the Fed’s declining balance sheet. “The worst in the bond market is selling and volatility [of] rate expectations are already behind, “writes Jonas Goltermann, senior economist at Capital Economics.
Still, no one can guess whether the reduction in bond demand from the implementation of the balance sheet reduction will cause the 10-year yield to come out again. That would be a problem for the stock market.
“The elephant in the room is that today the Fed is starting to reduce its balance sheet by $ 9 trillion, something the market has very little experience with,” writes Louis Navellier, founder of Navellier & Associates.
Abroad, the pan-European Stoxx 600 fell 1% and Hong Kong’s Hang Seng Index lost 0.6%.
Here are five stocks on Wednesday:
Shares of Salesforce (ticker: CRM) rose 10% after the enterprise software company raised its adjusted earnings forecasts for the fiscal year.
The company reported a profit of 98 cents per share, surpassing estimates of 94 cents per share, with sales of $ 7.44 billion, above expectations of $ 7.38 billion. The company targeted a full annual BPA of $ 4.75 at the midpoint of its range, noting that its operating margin will grow as it controls costs even as sales grow. This was good news for a value that had already been defeated during the year. “Salesforce delivered a much better-than-expected April quarter and guidance that will be a great relief for technology investors,” wrote Wedbush Securities analyst Dan Ives.
Capri Holdings (CPRI) shares gained 2.3% after the company reported a profit of $ 1.02 per share, exceeding estimates of 82 cents per share, with sales of $ 1.49 billion, above of expectations of $ 1.4 billion. The company announced a new $ 1 billion share repurchase program.
Shares of Victoria’s Secret (VSCO) rose 8.8% after the company reported a profit of $ 1.11 per share, exceeding estimates of 84 cents per share, with sales of $ 1.48 billion. according to expectations.
Amazon.com (AMZN) is up 2.5% after JPMorgan called the stock its best e-commerce idea.
Shares of Park Hotels & Resorts (PK) gained 3.5% after being upgraded to Buy from Hold at Truist.
Write to Jack Denton at jack.denton@dowjones.com and Jacob Sonenshine at jacob.sonenshine@barrons.com