Hawkish Fed hurts stocks
Stocks are under pressure due to concerns the Federal Reserve might hike interest rates in the coming months. Last night the minutes from the Fed’s meeting in December were released, and the hawkish tone ramped up fears that rates could be increased in the next few months. Traditionally, the prospect of higher rates has dented stocks as investors typically move funds into deposit accounts to earn a higher rate of interest. The fact that rates have been almost zero in the US for most of the past two years has contributed greatly to the major rally seen in equities, as deposit account returns have been so low. It now seems as if the Fed are moving closer to lifting rates, and that has sparked a slide in equities. The language used by the Fed pushed up the US 10-year yield to 1.73%, its highest mark since April 2020 – a rise in the yield suggests the bond market is anticipating a rate hike.
Stock markets in Europe and the US are suffering, and the NASDAQ 100 has experienced the most volatility this week as it is very sensitive to perceptions about potential interest rate hikes. Technology stocks are relatively indebted and seeing as the NASDAQ is very tech heavy in terms of constituents, the index has arguably the most to lose in the event of a rate hike.
The US dollar index was jolted higher last night in the wake of the Fed minutes being announced, and even though it has handed back some of those gains, it is still up when compared with the pre-Fed minutes level. Last month, the US dollar index hit a 17-month high, and the broader bullish trend is still intact.
Today’s ISM non-manufacturing report came in at 62, down from 69.1 in November. There was a big fall in activity due to the omicron variant of the coronavirus, and the new orders metric tumbled from 69.7 to 61.5. On the other hand, the prices paid level increased to 82.5 from 82.3. One of the reasons why the Fed adopted a more hawkish stance is because of the high level of inflation, so if prices continue to remain high, as seen in the ISM report, it is more likely the Fed will raise rates.
Silver is undergoing a major sell-off due to the rise in the dollar in the past 21 hours. The metal often comes under pressure when the greenback is firmer as it is traded in dollars. Gold is in the red too, but it isn’t suffering as much as the flight-to-quality play has prevented it from falling further.