Stocks sank while Treasury yields hit new multi-year highs after jobs data bolstered the case for the Federal Reserve to keep interest rates elevated. Dow posts worst day since March: With Tuesday’s losses, the Dow went into the red for the year, off by 0.4%. The broader S&P 500 is still up 10% for 2023.. Data showed U.S. job openings unexpectedly increased in August, fueling worries about a tight labor market ahead of Friday’s key U.S. monthly jobs report.
The S&P 500 fell 1.4% to a four-month low while the Nasdaq 100 index dropped 1.8% after job openings unexpectedly increased in August. A House vote oustering Speaker Kevin McCarthy could further fuel uncertainty tomorrow. Wall Street’s fear gauge, the CBOE Volatility Index or VIX, rose above 20 intraday — a key level signaling increased skittishness in the market — the highest such reading since May. The ICE BofA MOVE Index, which tracks expected bond volatility, also approached May peaks.
Shares of Amazon.com and Microsoft dropped after Reuters reported British media regulator Ofcom will push for an antitrust investigation into the companies’ dominance of the UK cloud computing market.
Investors are getting ready for U.S. companies in the coming weeks to begin reporting on the last quarter, with some hoping the results could provide some positive news again for the market.
Markets tumbled across the board after the number of available positions rose to 9.61 million from less than 9 million in July, according to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, or JOLTS. The report drove swaps traders to increase wagers on the Federal Reserve raising rates in December to better than a 50-50 odds.
Investors have yet to fully embrace the Fed’s higher-for-longer narrative and are instead following “fickle market momentum,” according to Luke Templeman, an analyst at Deutsche Bank. “Small catalysts are causing an outsized number to attempt to preempt market moves.”
“The dominant market theme, therefore, is one that many developed-market investors have not had to deal with since the ‘08-’09 crisis: volatility,” he added.
The next datapoint for the labor market will be a monthly payrolls print on Friday where traders will looking for any signs of cooling.
“Unless, the NFP report comes in lower than expected, Wall Street will likely start to fully price in at least one more Fed rate hike before the end of the year
Yields on the US 10- and 30-year traded to the highest level since 2007, with the longer-term bond reaching above 4.9%. Wall Street has been speculating that rates on longer dated bonds will hit 5%. The climb in yields was also stoking anxiety in the credit market where at least two issuers called off sales Tuesday. The average rate on a 30-year fixed mortgage neared 8%.
Seasonal weakness is “pretty normal” for the market in September and October, according to Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. However, he noted that ongoing concerns about higher interest rates could mean more downside is ahead for stocks.
“The threat to equities is more along the interest rate side. We really need to get through this bond sell-off, and find some type of equilibrium in the bond market, before we think stocks will be able to find a bottom,” he said
Volume on U.S. exchanges was 11.16 billion shares, compared with the 10.57 billion average for the full session over the last 20 trading days.
What drove markets
Climbing U.S. bond yields remain the prime focus of traders, with the selloff in stocks pushing the Dow into negative territory for the year.
*Stocks were starting the week and fourth quarter on a volatile note as the 10-year Treasury yield, the global benchmark, rose above 4.8% to its highest level since Aug. 13, 2007. The 30-year rate was at its highest in 16 years, too, jumping above 4.9%. *
“Stocks and bonds are taking it on the chin again with deteriorating liquidity conditions and stronger-than-expected economic data weighing,” according to José Torres, senior economist at Interactive Brokers.
Now investors have a new shot of strong data to handle. Job openings in August rose to 9.6 million from a revised 8.9 million in July. That tops forecasts of 8.8 million openings in August.
The newest numbers “underpinned the narrative that the labor market remained solid. Job seekers able to negotiate higher wages are a challenge for the Federal Reserve trying to address inflation with its benchmark rate.
What’s hovering over the market is the uncertainty as to how high we can expect rates to go. The other question is how high Treasury yields go. It is the speed at which these rates have risen that have jolted the market.
Higher implied borrowing costs, especially when rising quickly, tend to be a drag on equities, particularly since smaller or debt-laden companies may struggle to raise financing. Moreover, rising yields lower the present value of future corporate earnings, weighing on stock-market valuations.
What could be sinking in is the realization that interest rates and yields really are going to stay higher for longer.
“The strength of the headline is impressive and certainly bodes well for the ongoing strength in the US labor market,“ Ian Lyngen, head of US rates strategy at BMO Capital Markets, wrote. While the JOLTs numbers are from August, “investors are nonetheless interpreting this as yet further confirmation that the US economy can withstand higher real borrowing costs.”
A handful of Republicans in the U.S. House of Representatives on Tuesday ousted Republican Speaker Kevin McCarthy, as party infighting plunged Congress into further chaos just days after it narrowly averted a government shutdown.
The 216-to-210 vote marked the first time in history that the House removed its leader, with eight Republicans voting with 208 Democrats to remove McCarthy.
The rebellion was led by Representative Matt Gaetz, a far-right Republican from Florida and McCarthy antagonist who accused the party leader of not doing enough to cut federal spending or to stand up to Democratic President Joe Biden.
Republicans control the chamber by a narrow 221-212 majority, meaning they can afford to lose no more than five votes if Democrats unite in opposition.
McCarthy’s ouster as speaker essentially brings legislative activity in the House to a halt, with another government shutdown deadline looming Nov. 17 if Congress does not extend funding.
The White House said it hoped the House would move swiftly to choose a replacement speaker, a position second in line to the presidency after the vice president.
Wall Street strategists are warning about the impact that elevated interest rates have on equities, with Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. saying there’s a risk of further stock-market declines.
On Tuesday, Atlanta Fed President Raphael Bostic said there was no urgent need to change course soon. “I am not in a hurry to raise, but I am not in a hurry to reduce either,” Bostic said at a panel discussion. He forecast a single rate cut for 2024, toward the end of the year. Bostic’s comments follow other recent comments from Fed officials showing a willingness to keep interest rates higher for longer.
Comments from other Fed policymakers were more hawkish, with Cleveland Fed president Loretta Mester saying on Monday that one more rate hike was likely needed and Governor Michelle Bowman urging multiple increases.
Traders are seeing a roughly 30% chance of the Fed adding another 25 basis point hike at its coming meeting, according to the CME FedWatch tool.
More labor market data is coming this week. The September ADP private-sector employment report is released Wednesday, followed on Thursday by weekly initial unemployment claims. Then, Friday sees the all-important nonfarm payrolls report for September — and investors can gauge how that fits into the next chapter for interest rates.
The stronger-than-expected JOLTS data Tuesday could be a “harbinger” of a stronger-than-expected jobs report. That’s the key data release this week. The market is keenly focused on the broader labor landscape.
West Texas Intermediate crude recovered from an early drop to head back toward $90 a barrel while the dollar index reached a 10-month high. The rally in the greenback drove the yen to its weakest level in a year as the Japanese currency touched 150 per dollar before reversing.
European stock markets closed lower Tuesday as investors digested gloomy economic data from the region.
European utilities were 2.5% lower in early afternoon trade, with the prospect for higher for longer interest rates weighing on the debt-heavy sector.
Drugmaker AstraZeneca will pay $425 million to settle U.S. lawsuits which alleged its heartburn drugs Nexium and Prilosec caused kidney disease, the company said Tuesday.
In Asia-Pacific markets overnight, Hong Kong stocks fell about 3%, leading wider losses in the region. Hong Kong’s Hang Seng index traded 3.12% lower after coming back from a National Day holiday on Monday.
Companies in focus
•Cormick & Co. Inc.’s shares fell 8.5% after its third-quarter earnings. While profits met expectations, the spice and flavor market came up short in sales.
•Shares of electric-vehicle startup VinFast Auto Ltd. fell 4.8% to $9.33 Tuesday, taking the stock well below the $22 listing price when the company made its Nasdaq debut just seven weeks ago.
•Krispy Kreme Inc.’s stock ended up 0.6% to $12.51 on Tuesday after the company said it’s exploring its strategic options for Insomnia Cookies, including a potential all-cash sale.