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Stocks Sink as Swaps Show Jumbo Hike a ‘Done Deal’: Markets Wrap

Stocks Sink as Swaps Show Jumbo Hike a ‘Done Deal’: Markets Wrap
A morning commuter walks past buildings in Tokyo, Japan, on Thursday, 10 December 2015. (Photo: Tomohiro Ohsumi/Bloomberg)

Wall Street got another reality check, with data showing a hot labor market that will likely keep the Federal Reserve on its aggressive hiking trail. As a result: stocks sold off and benchmark Treasury yields pushed toward their longest weekly up streak since 1984.

To David Donabedian at CIBC Private Wealth US, the report puts an “an exclamation point” on the idea that the market bottoming process is going to be a long one. In this “bizarro world” of big hikes, traders may see the data as a reason to brace for turmoil, says Callie Cox of eToro. The bottom line for Brown Brothers Harriman’s Win Thin is that a 75-basis-point Fed boost in November is a “done deal,” with another increase of that size in December is becoming a “real possibility.”

More than 90% of the companies in the S&P 500 retreated on Friday, with a rout in technology shares weighing heavily on the market. The slide comes just a few days after the equity gauge posted its best two-day rally since the onset of the pandemic amid a debate on whether the Fed would be close to “peak hawkishness.” Treasury 10-year yields topped 3.8%. The dollar rose. Bitcoin sank below $20,000.

The swap contract for the November Fed meeting priced in nearly 75 basis points of tightening. The market-implied expectation for where the policy rate will peak also increased, with the derivative contract for the March gathering around 4.65%. The current range for the benchmark rate stands between 3% and 3.25%.

Fed Bank of New York President John Williams said interest rates need to rise to around 4.5% over time but the pace and ultimate peak of the tightening campaign will hinge on how the economy performs. Several Fed officials, in separate remarks this week, delivered a resolutely hawkish message that price pressures remain elevated and they won’t be deterred from raising rates by volatility in financial markets.

All eyes will now be on next week’s US inflation data after a hotter-than-expected reading in August tempered hopes of a nascent slowdown. Separately, minutes from the Fed’s September meeting will give clues into the central bank’s tolerance for economic pain.

More comments on jobs data:

Jeffrey Roach, chief economist at LPL Financial:

“In a word: ‘frustrating.’ As long as job gains are strong, the markets should expect aggressive rate hikes by the Federal Reserve.”

Michael Shaoul, chief executive officer at Marketfield Asset Management:

“This report should keep expectations of any ‘dovish pivot’ at bay, and underlines our concerns that any shift in policy is much more likely to be provoked by much worse financial market conditions than a soft landing in the underlying US economy.”

Shawn Cruz, head trading strategist at TD Ameritrade:

“The market has been in a ‘bad-news-is-good-news’ mentality and there’s really no bad news in this report. It’s a solid jobs report, but it’s not what the market wants to see because it doesn’t give the Fed a reason to pause or shift away from its hawkish intentions.”

Ronald Temple, managing director at Lazard Asset Management:

“While job growth is slowing, the US economy remains far too hot for the Fed to achieve its inflation target. The path to a soft landing keeps getting more challenging. If there are any doves left on the FOMC, today’s report might have further thinned their ranks.”

Seema Shah, strategist at Principal Global Investors:

“Today’s job number is a hawkish reading, with almost all the elements of the report moving in the wrong direction for the Fed.”

Ian Lyngen, head of US rate strategy at BMO Capital Markets:

“On net, it was a strong enough read to keep a 75 bp Nov hike as the path of least resistance, but the deceleration in wage growth YoY adds to the case for a slowed hiking pace to 50 bp in December, and we still expect the final 25 bp hike in February to reach terminal”

Cliff Hodge, chief investment officer at Cornerstone Wealth:

“The September jobs report reinforced the fact that the labor market remains tight and will keep the Fed on course for continuing to aggressively tighten monetary policy. The one silver lining from the report is on the wage front. Average hourly earnings continued to moderate month over month, which may help future inflation readings, but does nothing for the market today.”

Anxiety over the struggles from central banks to rein in inflation has been running rampant. Investors poured the most money into cash since April 2020 on fears of a looming recession, but stocks could see further declines as they don’t fully reflect that risk, say Bank of America Corp. strategists.

Even as major benchmarks bounced off last month’s lows, the bank’s report citing EPFR Global data showed cash funds received nearly $89 billion in the week through Oct. 5, while investors withdrew $3.3 billion from global stock funds.

Stocks

  • The S&P 500 fell 2.1% as of 12:06 p.m. New York time
  • The Nasdaq 100 fell 3%
  • The Dow Jones Industrial Average fell 1.5%
  • The Stoxx Europe 600 fell 1.2%
  • The MSCI World index fell 1.9%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.1%
  • The euro fell 0.1% to $0.9779
  • The British pound fell 0.5% to $1.1108
  • The Japanese yen was little changed at 145.21 per dollar

Cryptocurrencies

  • Bitcoin fell 2.4% to $19,563.18
  • Ether fell 2.2% to $1,334.4

Bonds

  • The yield on 10-year Treasuries advanced three basis points to 3.85%
  • Germany’s 10-year yield advanced 11 basis points to 2.19%
  • Britain’s 10-year yield advanced seven basis points to 4.24%

Commodities

  • West Texas Intermediate crude rose 4.4% to $92.33 a barrel
  • Gold futures fell 0.5% to $1,712.30 an ounce
Gallery

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