Tag Archives: bond markets

Business

Stocks Edge Higher After Wednesday’s Selloff

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U.S. stocks inched higher, putting Wall Street indexes on course to recoup some of Wednesday’s losses, while oil prices hovered near recent highs.

The S&P 500 rose 0.3% in early trading Thursday, a day after slumping 1.2%. The tech-focused Nasdaq Composite Index rose 0.2% and the Dow Jones Industrial Average gained 0.2%.

Stocks have struggled this year amid rising inflation, mixed economic signals, the war in Ukraine, and the continuing disruptions from the pandemic. The S&P 500 is down about 6% year-to-date, and the Nasdaq, down about 11%, is in its longest bear market since 2008.

That slump, however, comes on the back of a long rally. Wednesday marked the two-year anniversary of U.S. stocks’ pandemic lows. Since then, the S&P 500 and Nasdaq have doubled, while the Dow is up nearly 90%.

Investors have grappled with how Russia’s war with Ukraine will put additional pressure on supply chains that are already disrupted from Covid-19. Oil prices, which remain above $100 a barrel, have added to concerns that consumers could see higher prices for energy and even products like plastic wrap or lawn fertilizer. Federal Reserve officials have penciled in a series of additional interest-rate increases to limit inflation this year.

U.S. crude fell 1.2% to $113.58 a barrel.

“Through mid-February, it was all about rising rates, and then it was all about the war, and what’s concerning now is that they’ve combined,” said

Daniel Morris,

chief market strategist at BNP Paribas Asset Management. “The challenge in this environment is what do you buy. You can’t sit in cash. It is a ‘least-bad option’-type of market.”

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composite: Elizabeth Smelov

Among individual stocks, shares of

Nikola

rose 12% after the company confirmed that production has begun on its electric commercial truck, the Tre.

Uber

was up 3.3% after saying it would list all New York City taxis on its app.

Russia’s stock market jumped in its first limited trading session since the West unveiled punishing sanctions nearly a month ago. The benchmark MOEX index added about 4%. 

The increase is unlikely to be interpreted as a sign that all is well with the Russian economy. Only 33 shares out of 50 shares on the index were allowed to trade. To prevent a steep selloff, Russia’s central bank banned short selling, and blocked foreigners, who make up a huge chunk of the market, from selling their shares. 

The move will also help prevent the ruble from weakening, as foreign investors would likely sell their ruble-denominated shares and then move out of the ruble for the dollar or euro. Russia’s currency has trimmed some of its losses against the dollar in recent sessions, trading at 98 rubles to the dollar Thursday. 

In bond markets, the yield on the benchmark 10-year Treasury note ticked up to 2.367% from 2.320% Wednesday. Yields and prices move inversely.

Traders worked on the floor of the New York Stock Exchange on Tuesday.



Photo:

BRENDAN MCDERMID/REUTERS

Overseas, the pan-continental Stoxx Europe 600 was down 0.2%. Major indexes in Asia closed with mixed performance. China’s Shanghai Composite fell 0.6%, and Hong Kong’s Hang Seng declined 0.9%. Japan’s Nikkei 225 added almost 0.3%.

New orders for durable goods—products designed to last at least three years—fell 2.2% in February from the month prior after auto production was again held back by supply chain bottlenecks and

Boeing Co.

had a relatively weak month for aircraft orders. 

The number of Americans applying for first-time unemployment benefits fell to 187,000 in the week ended March 19, down from 215,000 in the week prior. 

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

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Business

The yield curve is speeding toward inversion — here’s what investors need to know

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The bond market’s most reliable gauge of the U.S. economic outlook for the past half-century is hurtling toward inversion at a faster pace than it has in recent decades, raising fresh worries about the economy’s prospects as the Federal Reserve begins to consider aggressively hiking interest rates.

The widely followed spread between 2-year
TMUBMUSD02Y,
2.170%
and 10-year Treasury yields
TMUBMUSD10Y,
2.384%
shrank to as little as 13 basis points on Tuesday, a day after Fed Chairman Jerome Powell opened the door to raising benchmark interest rates at more than a quarter percentage point at a time. Though slightly higher on the day as of Tuesday afternoon, the spread is down from as high as 130 basis points last October.

Investors pay close attention to the Treasury yield curve, or slope of market-based yields across maturities, because of its predictive strength. An inversion of the 2s/10s has signaled every recession for the past half-century. That’s true of the early 1980’s recession that followed former Fed Chairman Paul Volcker’s inflation-fighting effort, the early 2000’s downturn marked by the bursting of the dotcom bubble, the 9/11 terrorist attacks, and various corporate-accounting scandals, as well as the 2007-2009 Great Recession triggered by a global financial crisis, and the brief 2020 contraction fueled by the pandemic.

Inversions have already struck elsewhere along the U.S. Treasury curve, suggesting the dynamic is broadening out and could hit the 2s/10s soon. Spreads between the 3-, 5-, and 7-year Treasury yields versus the 10-year, along with the gap between 20-and 30-year yields, are all now below zero.

“The yield curve has the best track record within financial markets of predicting recessions,” said Ben Emons, managing director of global macro strategy
at Medley Global Advisors in New York. “But the psychology behind it is just as important: People begin to factor into their minds interest rates that are perhaps too restrictive for the economy and which could lead to a downturn.”

The following chart, compiled in February, shows how the 2s/10s inverted ahead of past recessions and has continued to flatten this year. The 2s/10s most recently inverted for a brief time in August and September of 2019, just months before a downturn sparked by COVID-19 hit in February to April of the following year.


Source: Clearnomics, Federal Reserve, Principal Global Investors. Data as of Feb. 9, 2022.

Ordinarily, the curve slopes upward when investors are optimistic about the prospects for economic growth and inflation because buyers of government debt typically demand higher yields in order to lend their money over longer periods of time.

The contrary is also true when it comes to a flattening or inverting curve: 10- and 30-year yields tend to fall, or rise at a slower pace, relative to shorter maturities when investors expect growth to cool off. This leads to shrinking spreads along the curve, which can then lead to spreads falling below zero in what’s known as an inversion.

An inverted curve can mean a period of poor returns for stocks and hits the profit margins of banks because they borrow cash at short-term rates, while lending at longer ones.

Though it slightly steepened on Tuesday, the 2s/10s spread is still flattening at a faster pace than it has at any time since the 1980’s and is also closer to zero than at similar points of time during past Fed rate-hike campaigns, according to Emons of Medley Global Advisors. Ordinarily, the curve doesn’t approach zero until rate hikes are well under way, he says.

The Fed delivered its first rate hike since 2018 on March 16, and is now preparing for a 50-basis-point move as soon as May, with Powell saying on Monday that there was “nothing” that would prevent such a move, though no decision had been made yet.

Some market participants are now factoring in a fed-funds rate target that might ultimately get above 3%, from a current level between 0.25% and 0.5%.

Meanwhile, Powell says the yield curve is just one of many things policy makers look at. He also cited Fed research that suggested that spreads between rates in the first 18 months of the curve — which are currently steepening — are a better place to look for “100%” of the curve’s explanatory power.


Sources: Bloomberg, Deutsche Bank

It’s the 2s/10s spread, though, that comes with a proven half-century track record. And it’s fair to say that whenever the spread is about to invert, observers have cast doubt on its predictive capabilities.

Read: Here are three times when the Fed denied the yield curve’s recession warnings, and was wrong (April 2019)

“Usually the yield curve is an excellent look into the not-so-distant future,” said Jim Vogel of FHN Financial. “Right now, however, there are so many things moving at the same time, that its accuracy and clarity have begun to be diminished.”

One factor is “terrible” Treasury market liquidity resulting from the Fed’s move away from quantitative easing, as well as Russia’s invasion of Ukraine, Vogel said via phone. “People are not necessarily thinking. They are reacting. People are not sure what to do, so they’re buying three-year maturities, for example, when typically people are more thoughtful about their choices. And those choices usually go into the accuracy of curve.”

He sees the spread between 3-year
TMUBMUSD03Y,
2.389%
and 10-year yields, which just inverted on Monday after Powell’s comments, as a better predictor than 2s/10s — and says that a sustained inversion of 3s/10s over one or two weeks would lead him to believe a recession is on the way.

On Tuesday, Treasurys continued to sell off sharply, pushing yields higher across the curve. The 10-year rate rose to 2.38%, while the 2-year yield advanced to 2.16%. Meanwhile, U.S. stocks recovered ground as all three major indexes
DJIA,
+0.74%

SPX,
+1.13%

COMP,
+1.95%
rose in afternoon trading.

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Business

U.S. Stocks Open Higher After Powell Says Fed Is Ready to Be More Aggressive

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U.S. stocks opened higher and government-bond yields jumped Tuesday, as investors digested Federal Reserve Chairman

Jerome Powell’s

more aggressive tone on reining in inflation.

The Dow Jones Industrial Average rose 157 points, or 0.4%, shortly after the opening bell. The S&P 500 also added 0.4% and the Nasdaq Composite climbed 0.4%. Major U.S. stock indexes ended lower Monday after Mr. Powell said the Fed was prepared to raise interest rates in half-percentage-point steps if needed to tamp down inflation.

In the U.S. Treasury market, a selloff in government bonds intensified, sending the yield on the 10-year U.S. Treasury note climbing to 2.364%, from 2.315% Monday. The yield on the benchmark note is now hovering around its highest yield since May 2019, before the Covid-19 pandemic upended financial markets. Yields rise when bond prices decline. 

Stocks, bonds, commodities and currencies have been whipsawed by volatility for the past month as investors have tried to assess the economic fallout from Russia’s war in Ukraine. Many investors now fear that the war could keep inflation sustained and stunt economic growth in the U.S. and Europe.

Traders worked on the floor of the New York Stock Exchange on Monday.



Photo:

BRENDAN MCDERMID/REUTERS

This week, however, investors were thrown a new curveball when Mr. Powell spoke Monday and struck a tougher tone than the one he used when the Fed lifted interest rates from near zero last week. He stressed the uncertainty facing the central bank and said officials are ready to move their policy in a more disruptive direction, saying the Fed would shift into a more restrictive stance if needed.

The comments prompted some analysts and investors to reassess interest-rate expectations. Economists at Goldman Sachs Group said in a note after Mr. Powell’s remarks that they now expect half-percentage-point increases at both of the Fed’s May and June meetings. That compares with expectations of quarter-percentage-point increases at both of the meetings previously.

“The message that came out of the [Fed] meeting last week is that they are going to be tightening [monetary policy] but the U.S. economy is resilient enough to withstand that,” said Huw Roberts, head of analytics at Quant Insight, a data analytics firm. “The equity market chose to emphasize the economic resilience portion.”

Monday’s comments rattled some of those expectations, he said, and heightened fears that the Fed could be tightening more quickly just as the economy is slowing. “The big variable now is the economic growth side of things,” Mr. Roberts continued. 

An inversion of the U.S. Treasury yield curve has been seen as a recession warning sign for decades, and it looks like it’s about to light up again. WSJ’s Dion Rabouin explains why an inverted yield curve can be so reliable in predicting recession and why market watchers are talking about it now. Illustration: Ryan Trefes

Many investors are keeping a close watch on the so-called yield curve, which measures the spread between short- and long-term rates and is often seen as a strong indicator of sentiment about the prospects for economic growth. Recently, the gap between yields on shorter-term and longer-term U.S. Treasury bonds has been shrinking, stirring anxieties that the bond market is close to signaling a potential recession. 

The two-year Treasury yield—which is especially sensitive to changes in monetary policy—climbed to 2.179% Tuesday, from 2.132% Monday. 

To get a better a read on the U.S. economic landscape, investors on Tuesday morning will parse data from the Federal Reserve Bank of Richmond on manufacturing activity. The economic data, due at 10 a.m. ET, is expected to register an increase from the prior month. 

In morning trading in New York, shares of banks rose, tracking similar moves in Europe. In the U.S.,

Morgan Stanley

and

Citigroup

each added more than 0.8%. In Europe,

Société Générale

advanced 0.9% and

Deutsche Bank

jumped 3.6%. 

In other sectors,

Nike

advanced 4.8% after it reported revenue that beat analyst expectations. Shares of

Okta

fell 4.5% after a hacking group posted screenshots purporting to show that it had gained access to Okta.com’s administrator and other systems. The company said Tuesday that a preliminary investigation found no evidence of any malicious activity, adding that the screenshots were most likely related to a January security incident.

In the energy markets, futures for Brent crude, the international benchmark, rose 0.7% to $116.43 a barrel. Last week, Brent prices fell below $100 before reversing and climbing higher. Support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, raising the possibility of more volatility ahead. 

In cryptocurrency markets, bitcoin rose about 4.2% from its 5 p.m. ET level Monday to trade around $42,896. The price of the cryptocurrency has swung sharply within the past month but has largely traded above $40,000 since the middle of last week.

In Europe, the pan-continental Stoxx Europe 600 increased 0.5%, putting it on pace to rise for a fifth consecutive session. 

In Asia, major indexes also largely ended higher. Hong Kong’s Hang Seng gained about 3.2%, while Japan’s Nikkei 225 rose 1.5%. China’s Shanghai Composite advanced 0.2%.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

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Business

Treasury Yields Rise Sharply as Investors Digest Fed Rate Increase

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U.S. government bonds yields rose sharply Wednesday after the Federal Reserve said it would lift short-term interest rates and signaled they could reach nearly 2% by the end of the year.

In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.239%, according to Tradeweb, compared with 2.160% Tuesday. The two-year Treasury yield—which is especially sensitive to changes in monetary policy—was recently 1.989%, up from 1.855% Tuesday.

Yields, which rise when bond prices fall, had drifted higher earlier in the session but added to those gains immediately after the Fed released its latest policy statement, which stated that the central bank would raise its benchmark federal-funds rate by a quarter percentage point to a range between 0.25% and 0.5% from near zero. A forecast for interest rates showed officials think rates could rise to roughly 1.9% by the end of 2022 and 2.8% by the end of next year.

The Federal Reserve’s main tool for managing the economy is to change the federal-funds rate, which can affect not only borrowing costs for consumers but also shape broader decisions by companies like how many people to hire. WSJ explains how the Fed manipulates this one rate to guide the entire economy. Illustration: Jacob Reynolds

Heading into Wednesday, yields had climbed substantially in recent sessions to their highest levels since 2019 as investors prepare for a new regime of tighter monetary policies.

This year has been a tough one for bond investors. When inflation started to accelerate last year, investors for months thought that it could subside on its own, allowing the Fed to keep short-term interest rates near zero. Those views, though, changed quickly this year due largely to a shift in tone from Fed officials, who began expressing more concern about inflation and an eagerness to start raising rates.

This year’s one significant bond rally came at the end of February when Russia first invaded Ukraine, casting uncertainty over the economic outlook.

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More recently, though, investors have grown more skeptical that the invasion could keep a lid on interest rates. Some have argued that higher commodity prices spurred by the invasion might only further stoke inflation, putting even more pressure on the Fed to tighten policy. Meanwhile, energy prices have already come down from their recent highs, driven in part by hopes for a negotiated settlement between Russia and Ukraine. That has eased the concerns of those that thought the higher prices could have the opposite effect: slowing economic growth and making it harder for the Fed to raise rates.

The Fed on Wednesday was seen as all but certain to raise its target for overnight interbank borrowing rates by a quarter percentage point to between 0.25% and 0.5%. As a result, investors are primarily focused on the Fed’s so-called dot plot, showing where individual officials expect rates to head over the next few years. They will also gauge the overall tone of Fed Chairman

Jerome Powell’s

news conference, looking to see whether officials are becoming even more worried about inflation.

Regardless of what officials say Wednesday, monetary policies—and therefore bond yields—will still be largely determined by the state of the economy.

On that front, new data showed Wednesday morning that retail sales rose a seasonally adjusted 0.3% in February, below analysts’ forecasts for a 0.4% increase. At the same, sales for January were revised upward to 4.9% from 3.8%.

Treasury yields were little changed after the report. In a note to clients, Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote that the data showed “a troubling trajectory” but that the upward revisions to January sales did “take the edge off of the disappointing Feb numbers.”

Write to Sam Goldfarb at sam.goldfarb@wsj.com

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World

Stock Futures, Bond Yields Drop on Fear of War in Ukraine

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The S&P 500 was poised for further losses and bond yields and global stocks retreated on the possibility of a war in Europe, after weekend diplomacy between Western leaders and Russia failed to yield a breakthrough.

Futures for the S&P 500 slid 0.9% Monday. Contracts for the technology-focused Nasdaq-100 and the Dow Jones Industrial Average fell 1.1% and 0.7%, respectively. If the losses continue through the opening bell, they will compound a decline for stocks sparked Friday by U.S. warnings that Moscow could invade Ukraine at any moment.

Overseas stock markets also dropped, catching up with Wall Street’s late-week tumble. The Stoxx Europe 600 lost 3.4%, led lower by shares of banks and travel and leisure companies. Japan’s Nikkei 225 fell 2.2% and China’s Shanghai Composite Index fell 1%.

Oil prices edged down, after jumping in early trading on concern a war would curtail supplies of Russian crude to global markets that lack significant spare supplies. Brent, the benchmark in energy markets, fell 0.3% to $94.07 a barrel, holding near its highest level since 2014.

The U.S. believes Russian President Vladimir Putin could order an invasion of Ukraine at any time, even before the Feb. 20 end of the Beijing Olympics, national security adviser Jake Sullivan said Friday. Russia has denied it intends to invade its neighbor. Photo: Russian Defense Ministry/AP

Prices for natural gas—of which Russia is the single biggest exporter globally—rose on both sides of the Atlantic. In the U.S., gas prices rose 4.5% to $4.12 per million British thermal units. Prices in Europe, which depends on Russia for much of its gas, a chunk of it flowing through Ukraine, jumped 8.8%.

Investors reached for assets they perceive to be havens at times of uncertainty. The yield on benchmark 10-year Treasury notes fell to 1.924% from 1.951% Friday, having reached a two-year high of 2.028% Thursday. Yields and bond prices move in the opposite direction. Gold futures rose 0.8% to $1,857.40 a troy ounce. 

Stocks have been buffeted this year by the prospect of an increase in interest rates by the Federal Reserve. The central bank is gearing up to raise borrowing costs to combat the highest rate of inflation in four decades, winding down the easy-money policies that have pushed riskier assets higher for much of the past two years.

The possibility of a ground war in Europe has loomed large as an additional source of uncertainty for investors. Moscow has denied intending to invade Ukraine, but Russia’s military buildup has quickened, with forces positioned on three sides of the country. They include some of Russia’s best-trained battalions and missiles that could strike targets throughout Ukraine.

Stocks have been buffeted this year by the prospect of higher interest rates.



Photo:

David L. Nemec/Associated Press

The U.S. and its allies are withdrawing diplomatic staff from Kyiv in a sign Western capitals see diplomatic options narrowing. Companies are also taking precautions. Dutch airline KLM has stopped flying in Ukrainian airspace. Shares of

Air France KLM,

the Paris-listed holding company, dropped 5%.

In recent weeks, investors had wagered that war would be averted, piling into the ruble and hryvnia currencies as well as Russian and Ukrainian government bonds. On Monday, those trades started to reverse.

Russia’s benchmark stock index, the Moex Russia, fell 3.1%. Ukraine’s hryvnia weakened 1.7% to trade at 28.55 a dollar. The yield on a dollar-denominated Russian government bond maturing in 2026 rose to 4.574% from 3.919% Friday, according to Tradeweb. A Ukrainian government bond maturing in 2033 traded at a yield of 11.286%, up from 10.222%.

Catching some investors off guard, the ruble strengthened 0.7% to trade at 76.93 a dollar. Timothy Ash, a strategist at BlueBay Asset Management, said the move suggested Russia’s central bank had intervened in foreign-exchange markets. “On the geopolitical risk, the ruble should be weaker,” he added.

Russia’s central bank has ample reserves of foreign currency with which to support the ruble. The bank didn’t immediately respond to a request for comment.

Investors say the standoff over Ukraine is difficult to trade because they have no particular insight into the possibility of an invasion and the nature and severity of the West’s response. If Moscow were to attack and the U.S. and its allies responded with sanctions, the hostilities could affect the world economy and markets in unpredictable ways. 

One likely consequence, given Russia’s position as a commodities superpower, would be higher energy prices, which could keep up the pressure on central banks to raise interest rates. At least in the short term, stocks and bond yields would likely decline as investors sought safe assets, investors say.

“We have the inflation story and then we have the Russian story,” said Lars Skovgaard Andersen, senior investment strategist at Danske Bank Wealth Management. In the event of an invasion, “there will be some negative effect on markets, but I also think investors are incorporating this,” he added.

Airline stocks were hammered in Europe after reports that several were avoiding Ukraine’s airspace. Budget carrier Wizz Air dropped 9.2%, British Airways owner International Consolidated Airlines Group lost 6.1% and Deutsche Lufthansa fell 4.7%.

Among individual U.S. stocks, Splunk rose 8.2% in premarket trading after The Wall Street Journal reported that

Cisco Systems

had made a takeover offer worth more than $20 billion for the software maker. Blackstone slipped 2.6% ahead of the bell after the private-equity company agreed to buy Australian casino operator Crown Resorts for $6.3 billion.

London-listed energy company BP, which owns almost 20% of Russia’s state-backed Rosneft Oil and invests in several joint ventures in Russia, fell 2.3%.

—Anna Hirtenstein contributed to this article.

Write to Joe Wallace at joe.wallace@wsj.com

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World

What a Russian invasion of Ukraine would mean for markets as White House warns attack could come ‘any day now’

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Investors on Friday got a taste of the sort of market shock that could come if Russia invades Ukraine.

The spark came as Jake Sullivan, the White House national security adviser, warned Friday afternoon that Russia could attack Ukraine “any day now,” with Russia’s military prepared to begin an invasion if ordered by Russian President Vladimir Putin.

U.S. stocks extended a selloff to end sharply lower, with the Dow Jones Industrial Average
DJIA,
-1.43%
dropping more than 500 points and the S&P 500
SPX,
-1.90%
sinking 1.9%; oil futures
CL.1,
+0.86%
surged to a seven-year high that has crude within hailing distance of $100 a barrel; and a round of buying interest in traditional safe-haven assets pulled down Treasury yields while lifting gold, the U.S. dollar and the Japanese yen.

Putin and U.S. President Joe Biden were slated to talk by phone Saturday in an effort to defuse tensions.

Analysts and investors have debated the lasting effects of an invasion on financial markets. Here’s what investors need to know.

Energy prices set to surge

Energy prices are expected to soar in the event of an invasion, likely sending the price of crude above the $100-a-barrel threshold for the first time since 2014.

“I think if a war breaks out between Russia and Ukraine, $100 a barrel will be almost assured,” Phil Flynn, market analyst at Price Futures Group, told MarketWatch. U.S. benchmark oil futures
CL00,
+0.86%

CLH22,
+0.86%
ended at a seven-year high of $93.10 on Friday, while Brent crude
BRN00,
+0.70%

BRNJ22,
+0.70%,
” the global benchmark closed at $94.44 a barrel.

“More than likely we will spike hard and then drop. The $100-a-barrel area is more likely because inventories are tightest they have been in years,” Flynn said, explaining that a monthly report Friday from the International Energy Agency warning that the crude market was set to tighten further makes any potential supply disruption “all that more ominous.”

Beyond crude, Russia’s role as a key supplier of natural gas to Western Europe could send prices in the region soaring. Overall, spiking energy prices in Europe and around the world would be the most likely way a Russian invasion would stoke volatility across financial markets, analysts said.

Fed vs. flight to quality

Treasurys are among the most popular havens for investors during bouts of geopolitical uncertainty, so it was no surprise to see yields slide across the curve Friday afternoon. Treasury yields, which move the opposite direction of prices, were vulnerable to a pullback after surging Thursday in the wake of a hotter-than-expected January inflation report that saw traders price in aggressive rate increases by the Federal Reserve beginning with a potential half-point hike in March.

Analysts and investors debated how fighting in Ukraine could affect the Federal Reserve’s plans for tightening monetary policy.

If Ukraine is attacked “it adds more credence to our view that the Fed will be more dovish than the market currently believes as the war would make the outlook even more uncertain,” said Jay Hatfield, chief investment officer at Infrastructure Capital Management, in emailed comments.

Others argued that a jump in energy prices would be likely to underline the Fed’s worries over inflation.

Stocks and geopolitics

Uncertainty and the resulting volatility could make for more rough sledding for stocks in the near term, but analysts noted that U.S. equities have tended to get over geopolitical shocks relatively quickly.

“You can’t minimize what today’s news could mean on that part of the world and the people impacted, but from an investment point of view we need to remember that major geopolitical events historically haven’t moved stocks much,” said Ryan Detrick, chief market strategist at LPL Financial, in a note, pointing to the chart below:


LPL Financial

Indeed, the takeaway from past geopolitical crises may be that it’s best not to sell into a panic, wrote MarketWatch columnist Mark Hulbert in September.

He noted data compiled by Ned Davis Research examining the 28 worst political or economic crises over the six decades before the 9/11 attacks in 2001. In 19 cases, the Dow was higher six months after the crisis began. The average six-month gain following all 28 crises was 2.3%. In the aftermath of 9/11, which left markets closed for several days, the Dow fell 17.5% at its low but recovered to trade above its Sept. 10 level by Oct. 26, six weeks later.

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Business

A ‘firestorm’ of hawkish Fed speculation erupts following strong U.S. inflation reading

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How hawkish will the Federal Reserve be this year?

At the moment, Wall Street economists seem to be telling their clients “more hawkish than we thought five minutes ago.”

The strong U.S. consumer inflation data reported Thursday has set off what looks like a chain reaction of upward revisions to projected interest rates rises and where the Fed is headed with monetary policy.

Fed watchers are talking seriously about an “emergency” interest rate hike before the Fed’s next formal meeting on March 16.

The consumer price index rose 0.6% in January, with broad based gains. The year-over-year rate rose to 7.5%, the highest level in 40 years.

Read: Consumer price inflation increases sharply in January

In the wake of the data, Goldman Sachs said it now sees seven consecutive 25 basis point rate hikes at each of the remaining Fed policy meeting this year. The investment bank’s earlier prediction was five hikes.

Economists at Citi said that their base case is a now for a 50 basis point hike in March followed by quarter point hikes in May, June, September and December.

Marc Cabana, head of U.S. rates strategy at BofA Securities, told Bloomberg Radio that it is very likely the Fed is going to raise rates by 50 basis points in March and “who knows, maybe even 50 in May.”

The talk about an inter-meeting rate hike before March 16 erupted late Thursday after St. Louis Fed President James Bullard said was open to having that discussion.

Market analyst Mohamed Ed-Erian said the frenzy of speculation is a sign the Fed has lost control of the policy narrative. He said he didn’t want to see the Fed take aggressive moves because the market will price in aggressive moves again and again.

“This is what typically happens in a developing country when a central bank loses control of the policy narrative,” he said.

March Chandler, forex analyst for Bannockburn Global Forex, said it will be difficult for Fed officials to get ahead of the curve of expectations.

It is a strange time for the Fed. The central bank has been slowly “tapering” or reducing the amount of securities is is buying under its quantitative easing program started in the depth of the pandemic. The buying of Treasurys and mortgage backed securities is scheduled to end in mid-March.

Some Fed watchers think the Fed may decide to end these purchases “cold turkey,” with the announcement coming Friday.

Under the Fed’s QE program, the Fed is scheduled to release its schedule for the last month of asset purchases.

“If the Fed releases that calendar at 3 p.m, it is pretty strong forward guidance they’re not going to do an intermeeting hike,” Cabana said.

Cabana said he didn’t expect a rate hike before the March 16 meeting. He suggested that investors who want to bet on an intermeeting hike would be better positioned to play for a 75 basis point hike in March.

However, Robert Perli, head of global policy at Piper Sandler, said the firestorm among Fed watchers felt like “much ado about little.”

“We are first to recognize that inflation is too high for comfort. But what we learned yesterday from both the CPI report and FOMC members doesn’t seem enough to change the policy outlook nearly as much as the market did,” Perli said, in a note to clients.

Three Fed officials were not as hawkish as Bullard in their comments the wake of the CPI report.

Richmond Fed President Tom Barkin told the Stanford Institute for Economic Policy Research on Thursday evening that he would have to be convinced of a need for a 50 basis point rate hike, Reuters said.

In an interview with Market News International, San Francisco Fed President Mary Daly downplayed the chances of a half-a-percentage point hike in March.

And Atlanta Fed President Raphael Bostic told CNBC after the CPI data that he was sticking with his call for four rate hikes this year, including a 25 basis point hike in March.

Tim Duy, chief U.S. economist at SGH Macro Advisors, called these dovish Fed comments “nonsensical.”

“It is just getting to the point where the distance between the Fed’s current position and reality is too wide to ignore any longer,” Duy said, in a note to clients.

U.S. stocks
DJIA,
-0.17%

SPX,
-0.45%
were mixed late morning Friday after a wild week on Wall Street. The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.024%
stayed above 2%, the highest level since 2019.

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Stocks Waver After Jobs Report, Tech Selloff

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U.S. stocks were mixed after the January jobs report beat expectations, putting investors on edge about the path of monetary tightening by the Federal Reserve.

The S&P 500 opened flat. The tech-focused Nasdaq Composite gained 0.6%, and the Dow Jones Industrial Average fell 0.3%.

U.S. payrolls grew by 467,000 in January, the Labor Department said Friday. Economists surveyed by The Wall Street Journal had expected a gain of 150,000.

Major indexes Thursday saw losses after megacap technology companies helped drag the market down.

Facebook

owner Meta Platforms in particular plunged after a disappointing earnings report.

Amazon.com

shares rallied 12% premarket after the e-commerce giant said profit nearly doubled in the critical holiday period, as the company controlled labor and supply costs better than expected and saw gains in its cloud-computing and advertising businesses.

Sharp moves in the share prices of large technology and social-media companies have an outsize impact on broader indexes. Amazon.com had a 3.3% weighting on the S&P 500 as of Wednesday, according to data from S&P Dow Jones Indices. Meta, whose shares tumbled Thursday, had a 2% weighting. 

Global markets have been highly volatile in recent weeks.



Photo:

Allie Joseph/Associated Press

“Those companies which have continued to deliver strong results have held up relatively well,” said

Mike Bell,

global market strategist at J.P. Morgan Asset Management. “Those companies which were priced as heavily valued growth stocks, but then under-delivered, are getting hit extraordinarily hard.” 

Snap shares surged about 39% premarket after the social-media company posted its first quarterly profit and signaled it is adjusting to disruptions in the digital-advertising market caused by

Apple

privacy policy changes that are affecting Meta.

Pinterest

jumped about 7% premarket after it reported its first full-year profit and more than $2 billion in annual revenue.

However,

Clorox

shares tumbled 15% premarket after the maker of disinfectant wipes and other cleaning products reported earnings that missed analysts’ expectations and said margins would take a steep hit from continued cost pressures.

Ford Motor

shares declined more than 6% premarket after the auto maker posted earnings that fell short of Wall Street forecasts.

The monthly jobs report reveals key indicators about the labor market and the overall state of the economy, but it doesn’t show the entire picture. WSJ explains how to read the report, what it shows and what it doesn’t. Photo illustration: Liz Ornitz

In bond markets, the yield on the benchmark U.S. 10-year Treasury note climbed to 1.886% after the release of the jobs report, versus 1.825% Thursday. Yields and prices move inversely. Oil prices climbed, with global benchmark Brent crude up 1.8% at $92.77 a barrel, due to supply tightness and a winter storm in the U.S. that may disrupt production.

International markets have been volatile in recent weeks, and on Friday, the pan-continental Stoxx Europe 600 fell 1%. Markets have been rattled by the increasingly hawkish tone from global central banks. On Thursday, the Bank of England raised borrowing costs again, while the European Central Bank kept its key interest rates unchanged, but signaled concern about inflation and opened the door to a possible rate rise this year.

Annual inflation in the eurozone rose to a record 5.1% in January, more than double the ECB’s target. Some investors are betting on future rate rises to curb inflation, and are selling government bonds, pushing the yield on Italy’s 10-year debt up to 1.718% Friday, from 1.650% Thursday. In a sign of rising risk aversion, the spread between benchmark Italian and German government bond yields rose to its highest level since July 2020.

The Federal Reserve has also set the stage for a series of rate increases in 2022, leading investors to shift toward investments that are deemed safer, such as stocks of companies that pay regular dividends.

The market volatility could continue until the Fed implements its first interest-rate increase and investors get used to the idea of rising rates, said

Peter Andersen,

founder of Massachusetts-based investment firm Andersen Capital Management. 

“The fact that everything is sold off wholesale is really, in my opinion, a buying opportunity,” Mr. Andersen said. “Every investor is so spooked now, and nobody really has a compass to figure out where exactly we are in this cycle.”

Since the start of this year, the Nasdaq Composite has lost more than 11%, while the S&P 500 has slid 6.1%. The Dow, in comparison, has fallen 3.4%.

In Asia, stocks in Hong Kong resumed trading Friday following a three-day holiday closure. The Hang Seng Index added 3.2%, led by gains in banking and technology stocks. Japan’s Nikkei 225 index rose 0.7%.

—Caitlin McCabe contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Dave Sebastian at dave.sebastian@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Is it time to bail out of the stock market? Wild price swings are shaking the resolve of some investors.

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Is it time to bail out of stocks and bonds? This isn’t the market that investors likely signed up for back in 2021 when shares in GameStop Corp.
GME,
+4.69%
and movie chain AMC Entertainment Holdings
AMC,
+3.72%
were headed to the moon, drawing in droves investing neophytes.

The meme-stock frenzy, the one underpinned by social-media chatter as opposed to fundamentals, has fizzled, at least for now. Highflying technology stocks that could change the course of the world have been under pressure, as benchmark bond yields turn up with the promise of a Federal Reserve that is closing the purse-strings of too-loose monetary policy.

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Economists and market participants are predicting three, four, maybe as many as seven interest-rate increases, of about a 0.25 percentage points each, this year to tackle inflationary pressures that have gotten out of hand.

Read: What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

The upshot is that borrowing costs for individuals and companies are going up and the cheap costs of funds that helped to fuel a protracted bull market is going away.

Those factors have contributed partly to one of the ugliest January declines in the history of the technology-heavy Nasdaq Composite Index
COMP,
+3.13%,
which is down nearly 12%, with a single session left in the month, leaving one final attempt to avoid its worst monthly decline since October of 2008, FactSet data show.

Check out: Is the market crashing? No. Here’s what’s happening to stocks, bonds as the Fed aims to end the days of easy money, analysts say

What’s an investor to do?

Jason Katz, senior portfolio manager at UBS Financial Services, says that he’s had an “increased volume of hand-holding calls” from his high-net worth clients.

Katz said he’s telling investors that “it’s not about exiting the market now but making sure you are properly allocated.”

“It’s not a systemic problem we have in [financial markets], it’s a rerating,” of assets that fueled a speculative boom.

“You had a whole constituency of investments that should have never traded to where they did,” Katz said, “Aspirational stocks, meme stocks…all fueled by fiscal and monetary stimulus and this year it is about a great rerating,” of those assets, he said.

Art Hogan, chief market strategist at National Securities Corporation, told MarketWatch that losses come with the territory of investing but investors tend to feel it more acutely when stocks go down.

“It is our nature to feel losses more sharply than we enjoy gains. That is why selloffs always seem much more painful than rallies feel pleasurable,” Hogan said.

It is always important to note the difference between investing and trading. Traders purchase assets for the short term, while investors tend to buy assets with specific goals and time horizons in mind. Traders need to know when to take their losses, and live to trade another day, but investors who usually have time on their side need to invoke different tactics.

That is not to say that investors shouldn’t also be adept enough to cut their losses when the narrative shifts but such decisions should hinge on a change in the overall thesis for owning assets.

Hogan said that investors considering bailing on markets now need to ask themselves a few questions if they are “afraid.”

“’Have my reasons, for investing changed?’”

“’Have my goals changed? Has my time horizon for the money changed?,’” he said.

“Most importantly, ask yourself the question: ‘Am I skillful enough to get back into the market after the average drawdown has occurred,’” he said. “They certainly, don’t ring a bell at the [stock market] bottom,” Hogan said.

Data from the Schwab Center for Financial Research, examining a group of hypothetical investors over a 20-year time period, also supports the idea that being out of stocks, and in cash, for example, is unlikely to outperform investing in equities, even if investors were badly timing the market.

“The best course of action for most of us is to create an appropriate plan and take action on that plan as soon as possible. It’s nearly impossible to accurately identify market bottoms on a regular basis,” according to findings from Schwab’s research.

To be sure, the market going forward is likely to be tough sledding for investors, with some speculating about the possibility of a recession. The Russell 2000 index
RUT,
+1.93%
entered a bear market last week, falling at least 20% from its recent peak. And the yields for the 10-year
TMUBMUSD10Y,
1.771%
and 2-year Treasury notes
TMUBMUSD02Y,
1.164%
have compressed, usually viewed as a sign of an impending recession if the yields for shorter dated bonds rise above those for longer maturities.

And the rest of the stock market, looks fragile, even after a Friday flourish into the close, other equity bourses are looking at big monthly losses. Beyond the Nasdaq Composite, the Dow Jones Industrial Average
DJIA,
+1.65%
is down 4.4% so far in January, the S&P 500 index
SPX,
+2.43%
is off 7% thus far in the month and the Russell 2000 index is down 12.3% month to date.

Katz said that he’s advising many of his clients to look for quality stocks. ”

“High-quality growth and tech names have been wearing the black eye for [speculative tech], but “those [quality] stocks are starting to find their footing,” he said.

Indeed, Apple Inc.
AAPL,
+6.98%,
for example, surged 7% on Friday to mark its best percentage gain since July 31, 2020.

Katz also said international, and developing markets are good investments as well as small and midcap stocks. “I would remain long equities here, it’s just the right equities,” the UBS wealth manager said.

That said, wild intra and interday price swings are likely to continue to be a feature of this phase in financial markets, as the economy transitions from the COVID-19 pandemic and toward a regime of higher rates.

But slumps don’t necessarily mean the end of the world.

“Not every pullback becomes a correction, and not every correction becomes a bear…and not every bear becomes a diaster,” Katz said.  

Hogan said that downturns also can be viewed as opportunities.

“Volatility is a feature not a bug, and the price we pay for the long-term higher average returns in the U.S. equity market,” he said.

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What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

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Federal Reserve Chairman Jerome Powell fired a warning shot across Wall Street last week, telling investors the time has come for financial markets to stand on their own feet, while he works to tame inflation.

The policy update last Wednesday laid the ground work for the first benchmark interest rate hike since 2018, probably in mid-March, and the eventual end of the central bank’s easy-money stance two years since the onset of the pandemic.

The problem is that the Fed strategy also gave investors about six weeks to brood over how sharply interest rates could climb in 2022, and how dramatically its balance sheet might shrink, as the Fed pulls levers to cool inflation which is at levels last seen in the early 1980s.

Instead of soothing market jitters, the wait-and-see approach has Wall Street’s “fear gauge,” the Cboe Volatility Index
VIX,
-9.28%,
up a record 73% in the first 19 trading days of the year, according to Dow Jones Market Data Average, based on all available data going back to 1990.

“What investors don’t like is uncertainty,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, in a phone interview, pointing to a selloff that’s left few corners of financial markets unscathed in January.

Even with a sharp rally late Friday, the interest rate-sensitive Nasdaq Composite Index
COMP,
+3.13%
remained in correction territory, defined as a fall of at least 10% from its most recent record close. Worse, the Russell 2000 index of small-capitalization stocks
RUT,
+1.93%
is in a bear market, down at least 20% from its Nov. 8 peak.

“Valuations across all asset classes were stretched,” said John McClain, portfolio manager for high yield and corporate credit strategies at Brandywine Global Investment Management. “That’s why there has been nowhere to hide.”

McClain pointed to negative performance nipping away at U.S. investment-grade corporate bonds
LQD,
+0.11%,
their high-yield
HYG,
+0.28%
counterparts and fixed-income
AGG,
+0.07%
generally to begin the year, but also the deeper rout in growth and value stocks, and losses in international
EEM,
+0.49%
investments.

“Every one is in the red.”

Wait-and-see

Powell said Wednesday the central bank “is of a mind” to raise interest rates in March. Decisions on how to significantly reduce its near $9 trillion balance sheet will come later, and hinge on economic data.

“We believe that by April, we are going to start to see a rollover on inflation,” McClain said by phone, pointing to base effects, or price distortions common during the pandemic that make yearly comparison tricky. “That will provide ground cover for the Fed to take a data-dependent approach.”

“But from now until then, it’s going to be a lot of volatility.”

‘Peak panic’ about hikes

Because Powell didn’t outright reject the idea of hiking rates in 50-basis-point increments, or a series of increases at successive meetings, Wall Street has skewed toward pricing in a more aggressive monetary policy path than many expected only a few weeks ago.

The CME Group’s FedWatch Tool on Friday put a near 33% chance on the fed-funds rate target climbing to the 1.25% to 1.50% range by the Fed’s December meeting, through the ultimate path above near- zero isn’t set in stone.

Read: Fed seen as hiking interest rates seven times in 2022, or once at every meeting, BofA says

“It’s a bidding war for who can predict the most rate hikes,” Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, told MarketWatch. “I think we are reaching peak panic about Fed rate hikes.”

“We have three rate hikes penciled in, then it depends on how quickly they decide to use the balance sheet to tighten,” Jones said. The Schwab team pegged July as a starting point for a roughly $500 billion yearly draw down of the Fed’s holdings in 2022, with a $1 trillion reduction an outside possibility.

“There’s a lot of short-term paper on the Fed’s balance sheet, so they could roll off a lot really quickly, if they wanted to,” Jones said.

Time to play safe?

““You have the largest provider of liquidity to markets letting up on the gas, and quickly moving to tapping the brakes. Why increase risk right now?””


— Dominic Nolan, chief executive officer at Pacific Asset Management

It’s easy to see why some beaten down assets finally might end up on shopping lists. Although, tighter policy hasn’t even fully kicked in, some sectors that ascended to dizzying heights helped by extreme Fed support during the pandemic haven’t been holding up well.

“It has to run its course,” Jones said, noting that it often takes “ringing out the last pockets” of froth before markets find the bottom.

Cryptocurrencies
BTCUSD,
-0.78%
have been a notable casualty in January, along with giddiness around “blank-check,” or special-purpose acquisition corporations (SPACs), with at least three planned IPOs shelved this week.

“You have the largest provider of liquidity to markets letting up on the gas, and quickly moving to tapping the brakes,” said Dominic Nolan, chief executive officer at Pacific Asset Management. “Why increase risk right now?”

Once the Fed is able to provide investors will a more clear road map of tightening, markets should be able to digest constructively relative to today, he said, adding that the 10-year Treasury yield
TMUBMUSD10Y,
1.771%
remains an important indicator. “If the curve flattens substantially as the Fed raises rates, it could push the Fed to more aggressive [tightening] in an effort to steepen the curve.”

Climbing Treasury yields have pushed rates in the U.S. investment-grade corporate bond market near 3%, and the energy-heavy high-yield component closer to 5%.

“High yield at 5%, to me, that’s better for the world than 4%,” Nolan said, adding that corporate earnings still look strong, even if peak levels in the pandemic have passed, and if economic growth moderates from 40-year highs.

Draho at UBS, like others interviewed for this story, views the risk of a recession in the next 12 months as low. He added that while inflation is at 1980s highs, consumer debt levels also are near 40-year lows. “The consumer is in strong shape, and can handle higher interest rates.”

U.S. economic data to watch Monday is the Chicago PMI, which caps the wild month. February kicks off with the Labor Department’s job openings and quits on Tuesday. Then its ADP private sector employment report and homeownership rate Wednesday, following by the big one Friday: the January jobs report.

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