What rate rally? Major indexes give back Wednesday’s gains and more as investors rethink the impact of higher borrowing costs on consumers and businesses.
Reassess the Impact of Rising Rates on Consumers and Businesses
Treasury Rates and Rising U.S. Dollar Rattle Tech and Multinational Investors Alike
Productivity Comes in at a 75-Year Low
Shawn Cruz, Senior Market Strategist, TD Ameritrade
(Thursday Market Close) Stocks staged a stunning reversal of Wednesday’s Fed rate announcement rally, as investors considered the steepest drop in U.S. productivity in 75 years and 10-year Treasury yields (TNX) edging above 3% for the first time since 2018.
The S&P 500 (SPX) lost more than 3% while the tech-heavy Nasdaq Composite ($COMP) finished down 5% at the close. With the Dow Jones Industrial Average ($DJI) falling more than 3.1% during the session, the major indexes gave back most of Wednesday’s gains.
Nonfarm productivity slid at a 7.5% annualized rate last quarter, the deepest since the third quarter of 1947, the Labor Department said on Thursday. Fourth-quarter numbers were revised to show productivity growing at a 6.3% rate instead of the previously reported 6.6% pace. Nonfarm productivity measures hourly output per worker.
The rise in the 10-year Treasury yield pressured valuations of all stocks and in particular technology and consumer discretionary stocks throughout the session. Investors had to revalue their holdings once again on a discounted future cash flow model to account for the higher yields. At the same time, the U.S. Dollar Index ($DXY) is moving ever higher, exceeding 2020 highs and testing 2017 highs. As I’ve mentioned before, the strong dollar is trouble for U.S. multinationals operating overseas because a stronger dollar makes their products and services more expensive to foreign customers.
News from overseas wasn’t helping much. April’s China’s Caixin purchasing managers’ index came in at 36.2 for April, down from 42 in March, as the nation continues its zero-COVID policy. Results under 50 indicate a slowing economy. Meanwhile, Bank of England raised its key interest rate to the highest level since 2009, adding that inflation may peak at more than 10% as the ongoing Russia-Ukraine war continues to drive energy and other consumer and business cost throughout Europe.
One standout gainer was electric heavy truck maker Nikola (NKLA), which gained 6.39% after reporting its first shipments to customers in April and letters of intent for 500 of its battery-electric Tre models.
So much of today’s action appeared to be driven by the bond
markets because rising yields drove concerns over stock valuations and currency
risks for multinational mega-cap companies. While the Fed attempted to try and
remain even-keeled, apparently the bond market felt the central bank was too dovish,
and that inflation would continue to be a problem under the Fed’s current plan.
The issue may lie with what Chair Jerome Powell called a
“softish landing.” A soft landing is where the Fed slows inflation without
hurting the economy too much. Few analysts believe the Fed can do this because
the Fed doesn’t have a good track record of soft landings. It’s a very
difficult dismount for sure.
Some critics say that the Fed is overly concerned with the
“wealth effect” keeping consumption relatively strong while the Fed tightens.
The wealth effect is the economic theory that people spend more money when they
feel rich. If the Fed can help keep the stock market from falling, then people
may continue to feel rich enough to not cut spending too much. Judging by
today’s reaction, bond investors have serious doubts the Fed can walk this
May 6: Employment situation report and earnings from
Alibaba (BABA), and Cigna (CI)
May 9: Earnings from Duke Energy (DUK), Simon
Property (SPG), BioNTech (BNTX), and Tyson Foods (TSN)
May 10: Earnings from Occidental (OXY), Suncor Energy
(SU), and Sysco (SYY)
May 11: Consumer Price Index (CPI) and earnings from
Toyota (TM), Walt Disney (DIS), and JD.com (JD)
May 12: Producer Price Index (PPI) and earnings from
May 13: Michigan Consumer Sentiment and earnings from
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