Nasdaq tumbles on higher bond yields

Nasdaq continued to lead markets down this morning as traders digested a pessimistic assessment of the Fed’s statement yesterday. Jobs data continues to demonstrate that the economy is not slowing. 10-year bond yields spiked to almost 4.5%, rates last seen in 2006, and putting a strain on the valuation of equity markets.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Powell’s message: “higher for longer”

The Federal Reserve still has more work to do to get inflation down to its 2% mandate, according to Fed Chair Jerome Powell. The central bank hinted that another rate hike is likely yet this year, but it also worked to dial back expectations of a big pivot in 2024. Market translation: rates will remain “higher for longer.”  Powell did indicate that “we are in a position to proceed carefully,” suggesting that the central bank likely sees itself as being near the peak interest rate level. However, Powell also said, “We are prepared to hold at a restrictive level until we’re confident that inflation is moving down.”

This narrative is seen as negative for the economy, but it is consistent with how you bring down inflation. You cannot reach the 2% mandate for inflation without inflicting more pain on the economy, and that seems to be what the Fed is trying to avoid saying. Said or unsaid, Wall Street got the message. Some commentators believe that rates would have been hiked at this meeting were it not for: a possible government shutdown in nine days; an expanding UAW; and, rapidly rising oil prices. Rising oil prices are a mixed blessing, tending to slow the economy, but also bringing inflation.

European central banks hold interest rates

The Bank of England held interest rates steady on Thursday, after hiking 14 times in a row after an unexpected slowdown in inflation. Elsewhere in Europe, there were a couple of surprises: the Swiss National Bank kept rates on hold; Norway's central bank signaled another hike in December, following September's hike.

Leading indicators, home sale show weakness

A string of negative readings suggest that we should have been in a recession some time ago, but as Fed Chair Jerome Powell indicated yesterday, the economy continues to prove resilient, except for manufacturing and for the housing sector.

• The Index of Leading Economic Indicators fell for the 17^th consecutive time, by -0.4% in August, and below the -0.3% posted for July
• Existing home sales fell to an annualized level of 4.04 million units in August, down from 4.07 million in July – a 15.3% year-on-year decline. (Who wants to trade that for a 7% or 8% mortgage? That leaves us with pent-up demand for new homes)

Unemployment claims fall, labor market still tight

Falling unemployment claims continue to reflect a tight jobs market. Taken together with more common Labor strikes, wage inflation will continue to be a problem. All of this makes it difficult to get overall inflation down to the Fed’s 2% mandate.

• First-time claims for unemployment benefits fell to 201,00 in the week ending September 16, down from 221,000 the previous week,
• The four-week moving average for claims is down to 217,000 from 224,750 last week
• Continuing claims for the week ending September 9 dropped 21,000 to 1.662 million

TODAY’S MAJOR MARKETS

Nasdaq leads equities lower

• Equity markets fell as interest rate expectations were revised up, with Nasdaq, the S&P 500 and Russell 2000 off 1.3%, 1.2% and 1.0% respectively
• Foreign markets also fell overnight, with the Nikkei 225, Dax and FTSE 100 off 1.4%, 1.3% and 0.7% respectively
• The VIX, Wall Street’s fear index, rose sharpy to 16.1

Bond yields hit decades highs

• 2-year yields fell back marginally to 5.14%, but 10-year bond yields rose markedly to 4.47%
• The dollar index maintained an important technical level at 105.3
• Versus the dollar, Sterling was down 0.3%, the Euro was unchanged and the Yen rose 0.5%

Oil hovers around $90 mark, gold and silver see profit-taking

• Crude oil prices rose 0.2% to 89.2 per barrel
• Spot gold and silver prices were off 1.5% and 1.0%, respectively, at $1,938 per ounce, and $23.6 per ounce
• Grain and oilseed prices remain under pressure, aided by early harvest pressure amid ongoing weak export demand

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]