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US Stocks Drift Lower Friday 08/28 15:24
The bond market swung Friday as investors built bets that the Federal
Reserve may hike interest rates soon to get the nation's high inflation under
control.
NEW YORK (AP) -- The bond market swung Friday as investors built bets that
the Federal Reserve may hike interest rates soon to get the nation's high
inflation under control. U.S. stocks, meanwhile, dipped but not by much after
economists said a speech by Chairman Kevin Warsh helped strengthen faith that
the Fed will do what's needed to bring inflation down, even if it causes pain
for the economy in the short term.
The S&P 500 fell 0.2% after flipping between modest gains and losses through
the morning. The Dow Jones Industrial Average dipped 9 points, or less than
0.1%, and the Nasdaq composite slipped 0.5%.
The reaction was stronger in the bond market following Warsh's first speech
as chairman of the Fed at an annual economic symposium held in Jackson Hole,
Wyoming. The mountain setting has been the backdrop for major Fed policy
announcements in the past, and the pressure was on Warsh.
Worries had grown that his tough talk about getting inflation down to the
Fed's 2% target may be just that, unless the Fed backs it up with action. The
Fed could hike short-term interest rates to get inflation under control, but it
could also feel deterred from doing so because that would slow the economy and
hurt prices for investments. And President Donald Trump, who appointed Warsh,
has been vocal about wanting interest rates to be lower rather than higher.
Warsh was adamant again on Friday that he wants to give financial markets
fewer clues about what the Fed plans to do with rates for its two jobs of
keeping inflation low and the job market strong. He has said he wants markets
to react to what incoming data says about the economy and inflation rather than
what the Fed says.
But Warsh also said Friday that "short-term interest rates are the
predominant tool" for the Fed to do its job. And he said, "I would be hard
pressed to describe broad financial conditions as restrictive," an implication
that short-term interest rates may not be high enough to tamp down the economy
and inflation.
The yield on the two-year Treasury, which closely tracks expectations for
what the Fed will do with its federal funds rate, jumped to 4.35% from 4.22%
just before the speech.
That's a big move for the bond market, and it was because traders upped
their forecasts that the Fed will hike its federal funds rate as soon as next
month. They're now betting on a nearly 58% probability of that, up from the 35%
seen a day earlier, according to data from CME Group.
Longer-term yields also rose following some initial zigzags, but not by as
much as shorter-term yields. The 10-year Treasury yield climbed to 4.72% from
4.67% late Thursday, and the 30-year Treasury yield got to 5.21% from 5.19%.
All the moves, including the modest ones for stocks even though higher
interest rates tend to hurt them, indicate investors "pricing a more credible
Fed," according to economists at Bank of America led by Aditya Bhave.
"The positive market reaction highlights that investors place a premium on
policy clarity, even when that clarity carries" a message implying higher
interest rates, according to Seema Shah, chief global strategist at Principal
Asset Management.
Yields had gotten so high for longer-term bonds this summer, in part because
of worries about inflation staying high in the future, that the U.S. Treasury
Department made an unusual move last week and said it would buy back more
bonds, though analysts said it will likely have only a limited effect.
On Wall Street, Gap jumped 12.9% after the retailer reported stronger profit
for the latest quarter than analysts expected. It also said Michael Francis, an
industry veteran who began his career on the retail sales floor, will take over
as head of its Old Navy stores.
Marvell Technology fell 10.3% even though the chip company reported profit
and revenue for the latest quarter that edged past analysts' expectations. CEO
Matt Murphy said its business related to artificial-intelligence technology is
strong, and it raised its forecasts for upcoming revenue growth.
But analysts said much of that optimism may have already been baked into
Marvell's stock price, which came into the day with a surge of 184% for the
year so far.
After rocketing higher for years because of the frenzy around AI, stocks
across the industry are confronting skepticism that they shot too high and that
booming demand for AI chips may fade if the AI revolution does not produce as
much profit as promised.
All told, the S&P 500 fell 19.23 points to 7,711.76. The Dow Jones
Industrial Average dipped 9.45 to 53,559.99, and the Nasdaq composite sank
138.93 to 26,402.42.
In stock markets abroad, indexes rose across much of Europe following a
mixed finish in Asia. South Korea's Kospi fell 1.8%, and France's CAC 40 rose
1% for two of the world's bigger moves.
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