The U.S. central bank hiked rates by 50 basis points (bps) on Wednesday, slowing down from four back-to-back 75 bps hikes, although Fed Chair Jerome Powell said recent signs of weakening inflation have not brought any confidence yet that the fight had been won.
The Fed’s policy-setting committee projected it would continue raising rates to above 5% in 2023, a level not seen since a steep economic downturn in 2007.
“The issue was the market was looking for rate cuts in 2023 and that’s not compatible with any credible economic scenario because you’d need to have quite a collapse in economic activity and a speedy deterioration of the labor market,” said Willem Sels, global CIO, private banking and wealth management at HSBC.
Money market participants currently expect at least two 25 bps rate hikes next year and borrowing costs to peak at 4.9% in the first half, before falling to around 4.4% by the year end.
Wall Street’s main indexes have staged a strong recovery since hitting 2022 lows in October on hopes of a less aggressive Fed, but the rally stalled in December on the back of mixed economic data and worrying corporate forecasts.
Investors also digested economic data on Thursday that showed a steeper-than-expected decline in retail sales in November and the number of Americans filing for unemployment benefits falling last week, indicating a tight labor market.
“Today’s data reinforces what Powell was saying yesterday that this is going to take time and the market seems to want to try and fast forward through the messy parts and it’s just not going to be able to do that because the Fed is not going to let it,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
The Bank of England and the European Central Bank also raised their key interest rate by 50 bps each and indicated an extended hiking cycle in a bid to tame spiraling inflation.
At 10:24 a.m. ET, the Dow Jones Industrial Average was down 669 points, or 1.97%, the S&P 500 was down 2.08%, and the Nasdaq Composite was down 2.33%.
All the 11 major S&P 500 sectors were in the red, with communication services and technology stocks falling more than 2% and bearing the brunt of selling pressure.
Shares of megacap companies which are sensitive to rising rates fell. Apple Inc, Amazon.com Inc and Microsoft Corp dropped between 1% and 3%.
Netflix Inc slumped 6.8% after a media report that the entertainment services firm would let its advertisers take their money back after missing viewership targets.
Nvidia Corp slipped 3.2% after HSBC Global Research began coverage of the chipmaker’s stock with a “reduce” rating, while Western Digital slid 9.2% following a report that Goldman Sachs downgraded the data storage firm’s stock to “sell” from “neutral.”
Declining issues outnumbered advancers for a 5.59-to-1 ratio on the NYSE and 3.61-to-1 ratio on the Nasdaq.
The S&P index recorded no new 52-week highs and four new lows, while the Nasdaq recorded 24 new highs and 120 new lows.
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