Wall Street stocks were headed for their worst week in nearly four months following comments from Federal Reserve policy makers who reported that the U.S. central bank was well aware of rising inflationary pressures.
The S&P 500 benchmark fell 1 percent on Friday, taking its losses for the week to 1.6 percent. About 90 percent of the shares in the blue-chip index were lower on the day, including shares of major US banks and major oil companies.
Investors have shifted from some of their most popular trades of the year, including a previous push into shares of smaller companies seen as particularly sensitive to economic growth. The Russell 2000 small cap index was on pace for its heaviest weekly loss since the end of January, falling 3.7 percent.
The moves followed comments by Jay Powell, president of the Fed, Wednesday that investors have taken note that the U.S. central bank is acting to tame inflation and that policy makers weren’t just focused on market support of hard work.
On Wednesday, Fed policymakers predicted that interest rates would rise from record low levels in 2023, from their previous forecast for 2024. This view gained further momentum after an interview with James Bullard, president of the St. Louis Fed, held Friday with the CNBC television network on Friday, where he said the first rate hike could come next year.
The change from the Fed’s policy makers shook the so called reflection trade, and, in turn, helped settle the bullfighting technologies that had lost momentum this year. While the tech-heavy Nasdaq Composite was 0.7 percent lower on Friday, it was expected to end the week at less than 0.1 percent.
Inflation expectations were marked dramatically this week when investors digested the Fed’s latest decision. George Saravelos, a strategist at Deutsche Bank, noted that changing inflation and growth expectations were “consistent with the resilience of continued equity, particularly in growth stocks,” where lower yields than good make the value of future earnings more attractive.
He added that the fact that fluctuations in financial markets have been “driven by a huge relative turnover from the Russell to the Nasdaq should not come as a surprise.” Saravelos compared it to the market between 2010 and 2019, when growth stock assessments grew on the side of moderate or low growth and low inflation.
The decline in equity accompanied a long-term rise in U.S. government bond prices on Friday as investors watched forecasts ahead of expectations of a rise in U.S. interest rates as well. a signal of the central bank’s willingness to control inflation.
The yield on the 10-year U.S. Treasury bond, which moves inversely to its price, was 0.06 percentage points lower at 1.44 percent.
This yield picked up by about 0.9 per cent at the beginning of the year but has moderated in recent months as investors have watched jump in U.S. inflation as temporary. Persistent inflation erodes fixed interest rates on bonds.
“The narrative of the bond market has changed on a whim,” said Tatjana Greil-Castro, co-head of public markets for credit investor Muzinich. “We had this idea before [coming out of the Covid-19 crisis] that inflation will be permanently high. So the story was that this was the top and [inflation] it would be on the go, and I think the story always changes because we don’t know it yet. ”
The dollar was also on pace for its best week since last September as Treasuries short-term yields rose, prices in the foreseeable future rises. The dollar index, which measures the green dollar against major currencies, rose 0.4 percent on Friday, bringing its weekly gain to 1.8 percent.
Gold, which is priced in dollars and often moves inversely to the U.S. currency, traded at $ 1,773 an ounce on Friday – a drop of nearly 6 percent since Monday in its biggest weekly drop. from March 2020.
“Because of the stupid surprise of rising tax expectations, you have seen a fairly aggressive move in the dollar,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Most of the market was bearish on the dollar ahead of this meeting, ”he said, as traders had anticipated before the Fed maintained ultra-free monetary policy.