By Vildana Hajric and Stephen Kirkland
U.S. stocks fell, dragged lower by tech shares, as investors assessed the outlook for monetary policy ahead of key inflation data later this week. Treasury yields moved higher and a rout in European sovereign bonds deepened.
The S&P 500 erased earlier gains and the Nasdaq 100 dropped to session lows, amid declines in social media and big tech names including Meta Platforms Inc., Microsoft Corp. and Alphabet Inc. Peloton Interactive Inc. soared after reports that it’s exploring takeover options. The Treasury curve steepened, with 10-year yield up almost 3 basis points, and the dollar was little changed.
Investors are grappling with the prospect of the steepest monetary tightening cycle since the 1990s, with markets pricing in more than five quarter-point Federal Reserve interest-rate hikes in 2022 following a strong U.S. jobs report. The U.S. inflation report this week could lead to more market volatility. A reading north of 7%, the highest since the early 1980s, is expected.
“Inflation remains the key variable that will determine whether stocks can extend this rebound or we see a drop back towards the January lows,” wrote Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. “If inflation remains hot, it’ll skew hawkish risks for the Fed, weigh on growth and pressure earnings. If inflation peaks and recedes, it’ll keep the Fed on the current track (four hikes and gradual balance sheet reduction), the recovery will stay strong, and earnings shouldn’t drop.”
The Fed is in a difficult spot, “trying to manage the real economy where we see that hot inflation and the financial economy, which quivers every time we talk about rate rises,” Karen Harris, Bain & Co. global head of macro research, said on Bloomberg Television.
Greek debt led a selloff in European peripheral bonds after European Central Bank Governing Council Member Klaas Knot said he expects a rate increase as early as in the fourth quarter. The ECB last week made a hawkish pivot, with President Christine Lagarde no longer excluding a rate hike this year.
U.S. stocks ended higher last week, but trading was volatile amid weak numbers at U.S. tech giants including Facebook-owner Meta Platforms and positive earnings from Amazon.com Inc. A strong jobs report on Friday while good for the economy also backed the case for a hawkish Fed stance.
“The market is in transition,” Chuck Cumello, president and chief executive officer of Essex Financial Services, said by phone. “You’re going from an accommodative Fed to one that’s going to tighten, you’re going from a scenario last year where the federal government was literally putting money in people’s pockets to spend and that’s not happening, and you have these big geopolitical events. It’s a very challenging environment for high P/E stocks.”
Meanwhile, Bitcoin rose for a fifth consecutive day, the longest winning streak since September, as investors re-embrace risk assets across global markets. The rally in crude oil stalled at around $92 a barrel.
In the latest on Ukraine, President Joe Biden and his French counterpart Emmanuel Macron spoke about responding to Russia’s military buildup on the Ukrainian border. Moscow has repeatedly denied that it plans an attack.
On the virus front, Hong Kong is set to report another record number of infections. Australia will allow double-vaccinated visa holders to enter the country from Feb. 21, ending about two years of strict international border controls. China locked down a city of 3.6 million people.
Here are some events to watch this week:
- Earnings: AstraZeneca, Commonwealth Bank of Australia, GlaxoSmithKline, Pfizer, SoftBank Group, Toyota Motor, Twitter, Uber, Walt Disney
- Federal Reserve Bank of Cleveland President Loretta Mester speaks Wednesday
- U.K. Bank of England Governor Andrew Bailey speaks Thursday
- U.S. consumer price index, initial jobless claims Thursday
Some of the main moves in markets:
- The S&P 500 fell 0.3% as of 12:12 p.m. New York time
- The Nasdaq 100 fell 0.6%
- The Dow Jones Industrial Average fell 0.1%
- The MSCI World index was little changed
- The Bloomberg Dollar Spot Index was little changed
- The euro fell 0.1% to $1.1433
- The British pound was little changed at $1.3528
- The Japanese yen rose 0.1% to 115.12 per dollar
- The yield on 10-year Treasuries advanced two basis points to 1.93%
- Germany’s 10-year yield advanced two basis points to 0.23%
- Britain’s 10-year yield was little changed at 1.41%
- West Texas Intermediate crude fell 1.1% to $91.26 a barrel
- Gold futures rose 0.6% to $1,818.10 an ounce
More stories like this are available on bloomberg.com