(Bloomberg) — Stocks kicked off the week with losses and bond yields climbed as a US services gauge rose unexpectedly, fueling speculation the Federal Reserve will keep its policy tight to fight stubborn inflation.
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Equities also came under pressure on the view that a recent rally would be overdone given the current set of economic risks. All major groups in the S&P 500 retreated, with Tesla Inc. weighing heavily on Monday after Bloomberg News reported the electric-vehicle giant plans to lower production at its Shanghai factory. The Russell 2000 of small caps slumped 2%.
A pullback in Treasuries drove the 10-year rate near 3.6%. Swaps showed a similar increase in expectations for where the Fed terminal rate will be, with the market indicating a peak of close to 5% in the middle of 2023. The current benchmark sits in a range between 3.75% and 4%. The dollar climbed.
“Good economic news is bad news for stocks as it will keep the risk elevated that rates might have to end up higher later next year,” said Ed Moya, senior market analyst at Oanda.
Morgan Stanley’s Michael Wilson, one of the US stock market’s most-vocal skeptics, has seen enough of the recent rally that he’d predicted and says investors are better off booking profits. He expects the S&P 500 to resume declines after the index crossed above its 200-day moving average last week, saying “we are now sellers again.”
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Even with the S&P 500 on course for its biggest fourth-quarter gain since 1999, the recovery in equities markets is likely to be a slog. An analysis of every bear market since 1960 suggests it could easily take over two years to recoup the index’s prior high, especially if recession plagues the near-term outlook, Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper said.
“Markets are likely to remain volatile, and we do not think the economic conditions for a sustained upturn are yet in place,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “In our view, economic growth is likely to slow further next year as the cumulative impact of Fed rate hikes weighs on activity.”
A majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse.
About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%, which is about where the market bets the Fed will stop hiking. Another 63% see defaults surging if rates peak above 5%.
Key events this week:
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US trade, Tuesday
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EIA crude oil inventory report, Wednesday
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Euro zone GDP, Wednesday
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US MBA mortgage applications, Wednesday
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ECB President Christine Lagarde speaks, Thursday
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US initial jobless claims, Thursday
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US PPI, wholesale inventories, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 1.3% as of 11:36 a.m. New York time
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The Nasdaq 100 fell 1.3%
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The Dow Jones Industrial Average fell 0.9%
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The Stoxx Europe 600 fell 0.4%
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The MSCI World index fell 0.8%
Currencies
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The Bloomberg Dollar Spot Index rose 0.6%
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The euro fell 0.3% to $1.0508
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The British pound fell 0.8% to $1.2184
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The Japanese yen fell 1.6% to 136.47 per dollar
Cryptocurrencies
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Bitcoin fell 0.2% to $17,078.54
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Ether fell 1.1% to $1,263.23
Bonds
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The yield on 10-year Treasuries advanced nine basis points to 3.58%
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Germany’s 10-year yield advanced three basis points to 1.89%
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Britain’s 10-year yield declined four basis points to 3.11%
Commodities
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West Texas Intermediate crude fell 0.7% to $79.40 a barrel
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Gold futures fell 1.3% to $1,786.80 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Emily Graffeo, Isabelle Lee and Michael MacKenzie.
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