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March 11, 2022

Wall Street lower as inflation hits 40-year high, inviting aggressive Fed tightening

Wall Street resumed its slide on Thursday, ending in the red as inflation hit a four-decade high, cementing expectations that the U.S. Federal Reserve would hike key interest rates at the conclusion of next week’s monetary policy meeting to prevent the economy from overheating.

Looming uncertainties surrounding Russia’s invasion of Ukraine also helped convince market participants to recommence their flight to safety.

While all three major U.S. indexes ended in the red, they pared their losses late in the day and closed well above session lows, as the U.S. equities market followed its best day in months on Wednesday by renewing a multi-session sell-off.

But the TSX managed to end higher, thanks again to a bounce in energy and materials stocks.

“It’s more of the same,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, noting that the equity market’s daily volatility is “being driven more by geopolitical than economic news.”

U.S. consumer prices surged in February to a 7.9% annual growth rate, according to the Labor Department, the hottest reading in forty years.

“The (CPI) print was not far off estimates,” Nolte added. “There will be more to come in the next month or two as some of the rising commodity prices get incorporated.”

While the market fully expects the central bank to raise the Fed funds target rate by 25 basis points at the conclusion of next week’s monetary policy meeting, the CPI data suggested the FOMC could move “more aggressively” to curb inflation in the upcoming year, as promised by Fed Chair Jerome Powell last week.

“It’s still expected the Fed will raise rates four to seven times in the next year or two to curb economic growth,” Nolte said, adding that “what complicates this, is the Fed has never raised rates with the yield curve this flat and volatility so high.”

“They’re trying to increase rates at a time when the market is in turmoil.”

Energy prices were the main culprit, with gasoline prices surging 6.6% in a single month, although the report did not reflect the entirety of spiking crude prices in the wake of Russia’s actions in Ukraine.

Those actions kept geopolitical jitters at a full boil, with peace talks showing little progress even as a humanitarian crisis unfolds and world oil supply pressures continued to weigh on global markets.

Amazon.com provided one of the day’s bright spots, its shares jumping 5.4% after the e-commerce giant announced a 20-for-1 stock split and a $10 billion share buyback.

The Dow Jones Industrial Average fell 112.18 points, or 0.34%, to 33,174.07, the S&P 500 lost 18.36 points, or 0.43%, to 4,259.52 and the Nasdaq Composite dropped 125.58 points, or 0.95%, to 13,129.96.

In contrast, the Toronto Stock Exchange’s S&P/TSX composite index ended up 88.47 points, or 0.4%, at 21,581.70, its highest closing level since Feb. 9.

“It’s the combination that it’s not yet a recession and we have commodity-driven inflation that I think has accounted for the TSX outperformance,” said Kurt Reiman, senior investment strategist for North America, BlackRock.

“Canada is a large exporter of many of the same exports that you see coming out of Russia and Ukraine.”

The TSX has gained 1.7% since the start of 2021, compared with a 10.6% decline for U.S. benchmark the S&P 500.

The TSX energy sector rose 1.7% even as oil prices declined.

The TSX materials group, which includes precious and base metals miners and fertilizer companies, added 2.3%, but technology shares were unable to build on the pervious day’s rally, losing 2.1%. Heavily weighted financials ended 0.1% lower.

In the U.S., six the 11 major sectors in the S&P 500 closed in negative territory with tech suffered the biggest percentage drop, while energy shares saw the largest gain.

The NYSE FANG+ index of market leading tech and tech-adjacent megacaps fell 2.1%.

Goldman Sachs Group Inc became the first major U.S. investment bank to announce it was closing operations in Russia. Its shares dropped 1.1%.

The S&P 500 banking index slid 1.0%.

Oracle Corp dipped nearly 6% in after-hours trading after the business software and cloud computing firm posted quarterly results.

Declining issues outnumbered advancing ones on the NYSE by a 1.62-to-1 ratio; on Nasdaq, a 1.72-to-1 ratio favored decliners. The S&P 500 posted 5 new 52-week highs and 12 new lows; the Nasdaq Composite recorded 28 new highs and 163 new lows. Volume on U.S. exchanges was 12.50 billion shares, compared with the 13.65 billion average over the last 20 trading days.

In the bond market, the benchmark U.S. 10-year Treasury yield rose on Thursday and topped 2% for the first time in two weeks after U.S. inflation data confirmed rapidly rising prices.

Expectations that the Fed will raise its benchmark overnight interest rate by at least 25 basis points on March 16 stand at 94%, according to CME’s FedWatch Tool.

The yield on 10-year Treasury notes was up 6.3 basis points to 2.011% after hitting 2.021%, its highest level since Feb. 17. The 10-year yield is on track to climb for a fourth straight day, its longest streak of gains in a month.

Oil prices settled lower after a volatile session, a day after its biggest daily dive in two years, as Russia pledged to fulfil contractual obligations and some traders said supply disruption concerns were overdone.

Since Russia’s Feb. 24 invasion of Ukraine, oil markets have been the most volatile in two years. On Wednesday, global benchmark Brent crude posted its biggest daily decline since April, 2020. Two days earlier, it hit a 14-year high at over $139 a barrel.

Brent futures fell $1.81, or 1.6%, to settle at $109.33 a barrel after gaining as much as 6.5% earlier in the session. U.S. West Texas Intermediate (WTI) crude fell $2.68, or 2.5%, to settle at $106.02 a barrel, giving up over 5.7% of intraday gains.

“I think some of the ‘war angst’ is coming out of the market,” said John Kilduff, partner at Again Capital in New York. “We rejected $130 twice this week. People are beginning to ask if there really is too much of a supply problem. There’s still plenty of Russian supply,” he said.

Russian President Vladimir Putin told a meeting that the country, a major energy producer which supplies a third of Europe’s gas and 7% of global oil, would continue to meet its contractual obligations on energy supplies.

However, oil from the world’s second-largest crude exporter is being shunned over its invasion of Ukraine, and many are uncertain where replacement supply will come from. Comments from United Arab Emirates (UAE) officials sent conflicting signals, adding to the volatility.

On Wednesday, Brent slumped 13% after the UAE’s ambassador to Washington said his country would encourage the Organization of the Petroleum Exporting Countries to consider higher output.

UAE Energy Minister Suhail al-Mazrouei backtracked on the ambassador’s statement and said the OPEC member is committed to existing agreements with the group to boost output by only 400,000 barrels per day (bpd) each month.

While the UAE and Saudi Arabia have spare capacity, some other producers in the OPEC+ alliance are struggling to meet output targets because of infrastructure underinvestment in recent years.

The United States made moves to ease sanctions on Venezuelan oil and efforts to seal a nuclear deal with Tehran, which could lead to increased oil supply. The market also anticipates further stockpile releases coordinated by the International Energy Agency and growing U.S. output.

“With some goodwill, co-ordination and luck, the supply shock can greatly be mitigated but probably not neutralised,” PVM oil market analyst Tamas Varga said.

Still, traders refused to call the oil rally over. Some said the recent slump could be due partly to profit-taking, noting oil remained up over 15% since the Ukraine invasion.

“We will probably have more speculation and some people who want to sell to take advantage, but we’re just in new territory here,” said Thomas Saal, senior vice president for energy at StoneX Financial Inc.

“The pattern does not look like we are at the top yet. Just when you think we are, the market finds new energy to go higher,” he said.

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