4.10pm: Hot ISM data adds fuel to fears of further rate rises
US markets extended their losses to close sharply lower as a strong ISM services index report added to fears that the Federal Reserve will keep on hiking rates which had been fuelled by Friday’s hot jobs report and average earnings data.
At the close the Dow Jones Industrial Average was down 483 points, or 1.4%, to 33,947, the S&P 500 slipped 73 points, or 1.8%, to 3,999 and the Nasdaq Composite declined 222 points, or 2%, to 11,240.
Mickey Levy at Berenberg noted commentary from ISM Services survey respondents generally pointed to solid demand, sustained input price pressures, and elevated supply and labor shortages.
“Given the Fed’s focus on services inflation as a bellwether for underlying inflationary pressures, sustained overheated demand in service sector industries will likely tip the Fed toward a higher rate path policy” he felt.
Stocks on the move included Tesla which fell 6.3% following reports it planned to cut output of its Model Y by more than 20% in its Shanghai plant this month.
VF Corporation, the company behind brands such as The North Face and Timberland dropped 10.4% after it lowered expectations for revenue and earnings in the second half of the year and announced its CEO was retiring.
Airlines were also in focus. United Airlines rose 2.6% as Morgan Stanley (NYSE:MS) upgraded to overweight from equal weight on the notion that 2023 could be a “goldilocks” year for the airline while Delta Airlines advanced 1.3% after being named a top pick by the firm.
12:07pm: All eyes, as usual, are on the Fed
At midday, the Dow was down 405 points, 1.2%, to 34,025, the Nasdaq Composite fell 176 points, 1.5%, to 11,286 and the S&P 500 dropped 61 points, 1.5%, to 4,011.
Investors are anticipating an interest rate hike of 0.5 basis points to come out of next week's Federal Reserve policy meeting. That would be a smaller increase than recent 0.75 bp jumps, but traders are in limbo in the meantime.
“Stock markets are distinctly underwhelmed by China’s all-too tentative moves towards reopening its economy, and instead have gone back to worrying about the Fed," said Chris Beauchamp, chief market analyst at online trading platform IG. "Friday’s jobs report continues to loom over markets, causing further losses as some dovish bets are pared back. While the pre-meeting blackout means we might be spared any Fed comments, it seems stocks will continue to trade in a negative fashion, at least until the meeting itself.”
9.35am: Focus on Fed’s next move
US stocks started the day lower as speculation over the Fed’s upcoming December interest rate hike decision on the back of Friday’s hotter-than-expected jobs report remained top of mind for investors.
Just after the market opened, the Dow Jones Industrial Average had shed 229 points or 0.7% at 34,201 points, the S&P 500 had slipped 28 points or 0.7% at 4,043 points, and the Nasdaq Composite was down 61 points or 0.5% at 11,401 points.
Forex.com market analyst Fawad Razaqzada said investors’ key focus was what kind of message the Fed will deliver to the market at its highly anticipated rate decision next week.
“The markets have concluded that the pace of tightening will slow down to 50 basis points,” he said. “The Fed is then likely to continue hiking at a slower pace a few more times before pausing to give time for the higher rates to work their way through the economy to create a soft landing and in order to cool inflation.”
But he noted that the market fully pricing in a 50 basis point rate hike for December may keep a ceiling on stock prices.
“Fears over a looming recession may also discourage investors from piling further into the stock markets after what has been a very impressive recovery in the last couple of months or so,” Razaqzada said.
6.30am: Fed may stick with pattern of 75bp increases
Wall Street is expected to open lower on Monday after continued strength in the US jobs report on Friday left the door open for the Federal Reserve to continue its pace of interest rate hikes.
Futures for the Dow Jones Industrial Average fell 0.4% in Monday pre-market trading, while those for the broader S&P 500 index declined 0.4% and the Nasdaq-100 futures shed 0.2%.
Friday's release of the closely watched US non-farm payrolls data for November “confirmed that the US labor market is still very much in good shape, and if the Fed wants to increase the rate at the same pace that they have been doing, they can certainly do so” commented Naeem Aslam, chief market analyst at AvaTrade.
The US economy added 263,000 jobs in November, well ahead of the 200,000 new positions expected by the market. The unemployment rate was unchanged at 3.7%, in line with analyst expectations, while an upside surprise to average hourly earnings also caught the market off guard.
The November jobs report was the last monthly report to come before the Fed’s two-day meeting on December 13-14, where it may now stick with its pattern of 75 basis point rate hikes rather than slowing to a 50 basis point increase, as hoped.
After heading into the red following the release of the report on Friday, the Dow managed to recover its losses by the closing bell, gaining 0.1% to 34,430, but the S&P 500 slipped 0.1% to 4,072 and the Nasdaq lost 0.2% at 11,462.
“Wall Street seemed somewhat confounded by those better-than-expected payroll figures on Friday, putting another bumper rate hike from the Fed squarely back on the table,” said James Hughes, chief market analyst at Scope Markets.
Other factors that could add to short-term volatility include the decision by OPEC+ to hold back from production cuts and talk of an easing of coronavirus (COVID) restrictions in China, Hughes added.
“Both of these factors could see further significant levels of volatility emerging in the short term, with the effectiveness of the EU oil price cap and the risk that COVID cases could rise rapidly in the world’s second-largest economy offering just cause for concern,” he said.
Contact the author at stephen.gunnion@proactiveinvestors.com