After the Fed’s policymakers’ comments, Wall Street’s stock market will have its worst week in nearly four months, which shows that the Fed is keenly aware that inflationary pressures are sprouting.
The benchmark S&P 500 index fell 1% on Friday, and this week’s decline narrowed to 1.6%. Approximately 90% of the stocks in the blue chip index fell that day, including those of major banks and US oil giants.
Investors withdrew from some of the most popular deals this year, including earlier purchases of stocks in small companies deemed particularly sensitive to economic growth. The small-cap Russell 2000 index is expected to record its biggest weekly decline since the end of January, down 3.7%.
Action followed Annotation Federal Reserve Chairman Jay Powell said on Wednesday that investors see it as a signal that the U.S. central bank will take action to curb inflation, and that policymakers are not just focusing on helping the country’s hard-hit labor market.
Fed policymakers predicted on Wednesday that interest rates will rise from record lows in 2023, higher than their previous forecast for 2024. This view was further promoted after St. Louis Fed President James Brad was interviewed by the television network CNBC on Friday, stating that he might raise interest rates for the first time this year.
The Fed’s shift in policy makers falter So-called deflationary tradeInstead, it helped boost technology stocks that lost momentum this year. Although the Nasdaq Composite Index, which is dominated by technology stocks, fell 0.7% on Friday, it fell less than 0.1% at the close of the week.
As investors digested the Fed’s latest decision, inflation expectations this week have fallen sharply. Deutsche Bank strategist George Saravelos pointed out that the shift in inflation and growth expectations is “consistent with the continued resilience of stocks, especially in growth stocks.” Lower bond yields make the value of future earnings more attractive.
He added that the volatility of the financial market is “caused by the huge relative rotation of the Russell Index to the Nasdaq Index, and this fact should not be surprising.” Saravelos compared it with the market from 2010 to 2019, when the valuation of growth stocks soared against the backdrop of low-to-medium growth and low inflation.
The fall in the stock market on Friday was accompanied by a rise in the price of US long-term government bonds, as investors viewed the forecast of US interest rate hikes earlier than expected as a signal that the central bank is willing to control inflation.
The yield on the benchmark 10-year U.S. Treasury bond is inversely proportional to its price, down 0.06 percentage points to 1.44%.
This yield has climbed from around 0.9% at the beginning of the year, but it has slowed down in recent months as investors begin to pay attention leap In the United States, inflation is temporary. Continued inflation has eroded the fixed-rate return on bonds.
Tatjana Greil-Castro, co-head of public markets at credit investor Muzinich, said: “The narrative of the bond market has been changing at will.” “First of all, we have this idea. [coming out of the Covid-19 crisis] Inflation will always be high.Then the story is this is the top and [inflation] Will decline, and I think the story will continue to change because we don’t know yet. ”
As short-term Treasury yields rise and interest rates are expected to rise in the future, the U.S. dollar is also expected to hit its best week since September last year. The U.S. dollar index, which measures the U.S. dollar against major currencies, rose 0.4% on Friday, with a weekly gain of 1.8%.
Gold, which is priced in U.S. dollars and is usually inversely proportional to the U.S. dollar, was quoted at $1,773 per ounce on Friday, down nearly 6% since Monday, marking its biggest weekly decline since March 2020.
Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management, said: “Because the hawks of interest rate hike expectations have been unexpectedly advanced, you have seen the dollar’s trend quite aggressive.” “Most markets are Bearish The U.S. dollar before this meeting,” he said, because traders had previously expected the Fed to maintain ultra-loose monetary policy.