After a severe sell-off on Wall Street, U.S. stock futures began little changed Thursday evening, as concerns about the Federal Reserve’s capacity to keep inflation low while maintaining steady economic growth resurfaced.
The S&P 500 contract moved sideways. The index had dropped 3.6 percent during the normal trading day due to underperformance in technology stocks. The Nasdaq fell 5%, its lowest level since June 2020, and the Dow plunged over 1,000 points.
Investors assessed the ramifications of the Federal Reserve’s newest telegraphed monetary policy path forward as stocks swung violently from gains to losses on Thursday. While investors cheered Fed Chair Jerome Powell’s comments that the central bank would not consider raising rates by more than 75 basis points at a time, they must also consider whether relatively less aggressive hikes will be able to bring down inflation, which is at its highest level since the 1980s.
“I think the markets were relieved [on Wednesday] that maybe Powell took 75 basis points off the table for additional rate hikes, implying the Fed might adopt a more moderate path,” Jeffrey Kleintop, Charles Schwab’s chief global investment strategist, told Editorials99 Finance Live on Thursday. “However, I believe the market recognised on Thursday that there are risks associated with that – possibly higher inflation.”
“With [Treasury] yields shooting higher, that’s exactly what we’re seeing. And this isn’t just a one-day phenomenon for me; it’s an ongoing theme “Kleintop continued. “If you go back to August of 2020, there’s been one big theme in the markets: short-duration stocks, which have a low price to cash flow, have outperformed longer-duration equities, which have a high price to cash flow… and that tendency is going to continue here.”
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On Thursday, long-end Treasury yields surged, with the benchmark 10-year yield rising above 3.03 percent. The continued rise in Treasury yields and borrowing costs has weighed on growth and technology firms, which are heavily priced on future earnings potential.
Investors are also anticipating Friday’s monthly employment data, which is expected to confirm the Federal Reserve’s judgement that the labour market in the United States remains extraordinarily tight. Non-farm payrolls are estimated to have increased by 380,000 in April, a modest decrease from March but still a strong month for job creation. In addition, the unemployment rate is predicted to fall to 3.5 percent, matching the lowest level since 1969 in February 2020.
“The job market is extremely tight… there are several geopolitical ramifications, particularly in areas such as energy and food, which pervade all aspects of life. Supply chains remain strained, and recent Chinese COVID shutdowns have added to the pressure “Simplify Asset Management CEO Paul Kim spoke with Editorials99 Finance Live on Thursday. “The bottom line is that there is an excessive demand for goods and services and an insufficient supply. And the Fed is incapable of resolving real-world issues, which I believe is what is causing this indigestion.”
“I don’t think we’ve reached the bottom yet,” Kim continued, “since we’re just getting started.” “There are perhaps hundreds of basis points left.”