U.S. stock indexes extended losses in afternoon trading Tuesday as investors digested Federal Reserve Chairman Jerome Powell’s hawkish message to Congress that the central bank will not rule out bigger interest rate hikes at the upcoming March meeting in order to tame stubborn inflation.
How are stocks are trading
- The S&P 500 SPX, -1.46% is down 60 points, or 1.5%, to 3,987
- The Dow Jones Industrial Average DJIA, -1.64% lost 557 points, or 1.7%, to 32,877
- The Nasdaq Composite COMP, -1.07% dropped 126 points, or 1.1%, to 11,549
On Monday, the Dow Jones Industrial Average rose 40 points, or 0.12%, to 33,431, the S&P 500 increased 3 points, or 0.07%, to 4,048, and the Nasdaq Composite dropped 13 points, or 0.11%, to 11,676.
What’s driving markets
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in prepared remarks to the Senate Banking Committee on Tuesday morning. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
In February, the Fed raised the federal funds rate by 25 basis points, a much slower pace after a half-point move in December and four jumbo 75 basis-point rate increases last year. However, Powell’s testimony to Congress on Tuesday hinted that the Fed may consider to re-up the size of their next rate increase to half-of-a-percentage-point at its next policy meeting on March 21-22.
Following Powell’s hawkish remarks, Fed-funds futures traders have priced in an over 60% chance of a 50 basis point rise, according to the CME FedWatch tool. Traders had seen only a 30% chance of a half-percentage-point hike one day earlier, and a 3.3% chance a month ago. That would take the main policy rate target to between 5% and 5.25%.
The sizzling January employment and inflation data have led some investors to bet on a terminal fed funds rate of around 5.5% or even as high as 6%, up from the FOMC’s average December projection of between 5% and 5.25%. This repricing led to a sharp stock-market selloff last month amid rising Treasury yields.
See: U.S. stocks drop as Fed chair Powell testifies to Congress
“Unsurprisingly, Powell delivered a message with hawkish undertones in his testimony to Congress. While acknowledging the recent string of economic data has been ‘stronger than expected,’ he reiterated that ongoing increases in policy rates are warranted,” wrote Charlie Ripley, senior investment strategist for Allianz Investment Management, in emailed comments.
“While some market participants might have been caught off guard by Powell’s comments, the reality is that he is largely affirming what the bond market has already priced in.”
The policy-sensitive two-year Treasury yield TMUBMUSD02Y, 5.002% jumped to 5% on Tuesday afternoon. That was the highest intraday level since July 2007, according to Dow Jones Market Data. The ICE U.S. Dollar Index DXY, +1.18%, a measure of the currency against a basket of six major rivals, jumped 1.1% to 105.53 and headed for one of its highest levels since January.
“Powell has a great way of smoothing over the rough spots. I think what caught people by surprise is the unvarnished hawkishness, rather than his comments where he can sometimes balance his hawkishness with something more market friendly,” Steve Sosnick, chief strategist at Interactive Brokers IBKR, +0.11%, said in a phone interview.
Maybe some investors were growing “complacent” that the story line would be a gradual easing of interest rates, but Sosnick said Powell’s stance is “very much in line with data dependence” that Powell has been emphasizing. That puts extra urgency on what the numbers reveal in February’s jobs report, he said.
Indeed, Powell said that there are “two or three very important data releases to analyze” before the time of the March meeting.
“Those are going to be very important in the assessment we have of this relatively recent data,” he said.
The semiannual testimony comes days ahead of the February jobs report on Friday and the monthly inflation report next Tuesday. Economists surveyed by The Wall Street Journal expect February payrolls to have grown by 225,000, while the unemployment rate remains unchanged at 3.4% from a month ago.
See: What stock-market investors want to hear when Fed’s Powell testifies before Congress this week
Powell will also be quizzed by the House of Representatives’ Financial Services Committee on Wednesday at 10 a.m. Eastern.
Economic data releases Tuesday include January wholesale inventories, which declined for the first time since mid-2020. The numbers, matching the estimates of economist polled by the Wall Street Journal, indicate businesses are shrinking their amount of unsold goods to correspond with softening consumer demand. Reports on January consumer credit are slated for release at 3 p.m.
Companies in focus
- Dick’s Sporting Goods Inc. DKS, +9.61% shares jumped 10.8% on Tuesday after the retailer beat estimates on its fourth quarter results and offered a muscular full year earnings outlook.
- Meta Platforms Inc. META, +0.31% shares were up 0.3% amid a report that the parent company of Facebook and Instagram is eyeing another round of layoffs. Any extra trim to the workforce, as reported by Bloomberg News, would follow layoffs late last year of more than 11,000 employees.
- Shares of WW International Inc. WW, +50.00%, the company also known as Weight Watchers, rallied more than 46%. The stock move comes after the company reported its fourth quarter results late Monday, also in the wake of Wall Street Journal reports that it was buying the telehealth platform Sequence.
- United Airlines Holdings gained 4% after the Justice Department sued to block JetBlue’s JBLU, -2.56% acquisition of budget carrier Spirit Airlines SAVE, +4.03%.
— Jamie Chisholm contributed to this article