Stocks fell the most since March, while Treasury 10-year yields climbed as the latest reading on the labor market just reinforced the case for the Federal Reserve’s higher-for-longer stance.

The S&P 500 dropped 1.6 per cent. All major U.S. equity benchmarks broke below their key 100-day moving averages — which is seen as a bearish signal by some technical analysts. Amazon.com Inc. and Nvidia Corp. led a rout in megacaps. Cisco Systems Inc. sank after agreeing to buy Splunk Inc. for US$28 billion. FedEx Corp., a barometer of economic growth, rallied on a solid forecast.

Wall Street’s “fear gauge” — the VIX index of stock volatility — extended its surge from the lowest since 2020 hit last week.

“A lot of investors had been second-guessing the Fed all along,” said Chris Gaffney, president of world markets at EverBank. “They’re committed to keeping inflation down and part of that, I think, is to keep rates higher for longer — and markets are finally coming to grips with that.”

Longer-dated U.S. yields climbed, with 10-year rates hovering near 4.5 per cent — a level last seen in 2007. Meantime, the two-year note yield fell. The differential between both yields — a proxy for confidence in the economy — narrowed.

The dollar rose. The yen rebounded after earlier approaching the 150 level that some analysts consider to be a trigger for intervention. The market is on tenterhooks ahead of the Bank of Japan’s policy decision Friday. The pound fell after the Bank of England kept rates unchanged for the first time in almost two years. The MSCI Emerging Markets Index of stocks erased its 2023 advance.

To Matt Maley at Miller Tabak + Co., while the Fed signaled it will indeed keep rates higher for longer, the central bank “did seem to push that narrative to an even greater degree than expected” — by raising the growth outlook and where officials expect the Fed funds rate to be trading at future dates in a significant manner.

“The outlook was significantly more hawkish than what the market was expecting,” said Fiona Cincotta, senior market analyst at City Index. “The Fed has been doing what it said it will do – keep rates higher for longer. The market is playing catch up with what the Fed has been saying all along.”

Applications for U.S. unemployment benefits fell to the lowest level since January last week, indicating a healthy labor market that continues to support the economy. Initial jobless claims dropped to 201,000. The median estimate in a Bloomberg survey of economists called for 225,000 applications.

“On net, it was a solid read from one of the closest to ‘real time’ employment data investors are afforded,” said Ian Lyngen at BMO Capital Markets. “It also marginally increases the chances the Fed hikes in November and certainly reinforces the Fed’s messaging regarding avoiding cuts as long as possible in 2024.”

With most of the Fed board supporting an additional hike in 2023, lower-than-expected jobless claims is the type of data that could make that a reality, according to Mike Loewengart at Morgan Stanley Global Investment Office.

“The Fed has been waiting for the labor market to loosen up, and so far it hasn’t happened,” Loewengart added. “But even if they don’t hike again, continued strength in the jobs market will likely translate into rates remaining higher for longer.”

Bond traders are bracing for Treasury yields to keep pushing higher after the Fed signaled it’s likely to hold interest rates at lofty levels well into next year.

Fifty-eight percent of the 172 respondents in the Bloomberg Markets Live Pulse survey conducted after the Fed’s decision said that two-year Treasury yields have yet to peak, while a plurality expect 10-year yields to climb over 4.5 per cent.

Bond investors’ pain isn’t over yet, even though the Fed is done raising interest rates, said Bill Gross, the former chief investment officer of Pacific Investment Management Co.

In an investment outlook, Gross said bond markets are headed for an unprecedented third year of losses, because of sticky inflation and widening deficits, a result of government fiscal spending he equates with throwing “money out of a helicopter.”

'SKEPTICAL'

Former Fed Bank of St. Louis President James Bullard said the central bank may need to raise rates further and hold them higher to guard against the risk of a reacceleration of inflation. Meantime, Former Treasury Secretary Lawrence Summers said policymakers are too optimistic with their latest set of economic projections, cautioning that they are at risk of being surprised by both faster inflation and weaker growth than they anticipate.

James Zelter, co-president of Apollo Global Management Inc., is “skeptical” the economy will achieve a soft landing, saying the effects of tighter monetary policy from central banks still haven’t been fully felt. 

Meantime, economic data also showed sales of previously owned U.S. homes declined in August to the lowest since the start of the year, restrained by limited inventory and historically high mortgage rates. The combination of high financing costs, diminished inventory and elevated prices has created one of the least affordable housing markets on record. 

Corporate Highlights

• Microsoft Corp. said its AI assistant for Windows will start rolling out Sept. 26 and the Office AI app will be widely available Nov. 1 as the software giant continues to bake generative artificial intelligence into its products.
• Rupert Murdoch is stepping down as chairman of the boards of Fox Corp. and News Corp. following a nearly seven-decade career, and will become chairman emeritus of each company.
• Comcast Corp.’s NBCUniversal has reached a five-year deal to air WWE’s Friday Night SmackDown, taking over broadcast rights that have belonged to Fox Corp. since 2019.
• Darden Restaurants Inc. is seeing more “softness” among households with incomes above US$125,000 compared to last year, Chief Executive Officer Rick Cardenas said.

Key events this week:

• China’s Bund Summit, Friday
• Japan CPI, PMIs, Friday
• Bank of Japan rate decision, Friday
• Eurozone S&P Global Eurozone PMIs, Friday
• U.S. S&P Global Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.8 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 1.7 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro was little changed at US$1.0660
• The British pound fell 0.4 per cent to US$1.2292
• The Japanese yen rose 0.5 per cent to 147.55 per dollar

Cryptocurrencies

• Bitcoin fell 1.8 per cent to US$26,595.91
• Ether fell 2.2 per cent to US$1,589.59

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 4.48 per cent
• Germany’s 10-year yield advanced three basis points to 2.74 per cent
• Britain’s 10-year yield advanced nine basis points to 4.30 per cent

Commodities

• West Texas Intermediate crude fell 0.1 per cent to US$89.55 a barrel
• Gold futures fell 1.4 per cent to US$1,940.20 an ounce