Dow, Nasdaq, S&P 500 all down as Wall Street warns of more than three 2022 rate hikes by Federal Reserve

By Vivien Lou Chen and Mark DeCambre

U.S. stock indexes remained lower Monday afternoon, with the information technology sector once again facing the brunt of the selloff, as the benchmark 10-year Treasury yield briefly rose above 1.8%, with worries about Federal Reserve policy reverberating in financial markets. Three Wall Street firms — Goldman Sachs Group Inc., JPMorgan Chase & Co., and Deutsche Bank AG — said they see the Fed delivering more than the three rate hikes that policy makers have penciled in for this year.

What’s happening

On Friday, the Dow finished nearly unchanged, but the S&P 500 fell 0.4% and the tech-heavy Nasdaq Composite lost 1%. According to FactSet, growth stocks underperformed value stocks last week by the most since election week 2020.

What’s driving markets

Investors are positioning for the prospect of higher interest rates as soon as March, with parts of Wall Street joining many economists in saying the Fed has waited far too long to hike. Traders are also bracing for a consumer-prices report on Wednesday that could show a 7% headline year-over-year rise for December, and similar gains that won’t let up until the March reading.The Nasdaq Composite, though off its worst levels, faced an intense selloff earlier on Monday, and is trading near its lowest level since mid-October while threatening to close below its 200-day moving average, at 14,688.73, for the first time since April 21, 2020, according to Dow Jones Market Data. The index needs to stay above 14,451.69 to avoid a correction, defined by market technicians as a 10% fall from a recent peak.Read: As stock market unravels Monday, here’s the level the Nasdaq needs to defend to avoid a correction

In an interview that aired on Monday, JPMorgan Chief Executive Jamie Dimon told CNBC that the U.S. is headed for the best growth in decades, and that he’d be surprised if the Fed hikes by only four times this year. That’s more than the three hikes signaled by Fed officials in their December projections.Economists at both Deutsche Bank (DBK.XE) and Goldman Sachs (GS) expect four rate hikes this year, and a reduction of the Fed’s more than $8 trillion balance sheet that could begin in the third quarter. But Deutsche’s researchers also see the possibility that policy makers might need to consider hiking interest rates at almost every meeting in 2022 “unless financial conditions notably tighten,” Jim Reid, head of thematic research, and others wrote in a Monday note.Read: Almost every Federal Reserve meeting in 2022 could be potentially `at play’ for a potential rate hike, Deutsche Bank saysGoldman’s chief economist Jan Hatzius said in a note late Sunday that “declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks.”Friday’s labor report came in at 199,000 jobs in December, worse than forecast, but it also showed a decline in the unemployment rate to a pandemic low and a rise in wages. The labor-market reading came after Fed minutes released last Wednesday signaled that policy makers are eager to tighten financial policy to battle inflation, with market-based projections pointing to at least three interest-rate increases this year.

Read: Jekyll-and-Hyde U.S. jobs report not as ugly as it looks

Some analysts are adopting a much more sanguine view of the market’s outlook, despite the eminent tightening of financial conditions. In a Monday note, BlackRock Investment Institute’s global chief investment strategist, Wei Li, and others said that although central banks will move away from emergency stimulus, they won’t necessarily “hit the brakes by raising rates to restrictive levels.” In addition, the three rate hikes being penciled in by policy makers for this year is “more than we expected.” “We prefer equities and would use COVID-related selloffs to add to risk,” they wrote.

Later in the week, investors will watch the confirmation hearing of Federal Reserve Chairman Jerome Powell, followed by one for Lael Brainard, the Fed governor who has been nominated to become the central bank’s No. 2 after Vice Chairman Richard Clarida steps down. A report on U.S. retail sales is due on Friday.

Which companies are in focus?

How are other assets faring?

Steve Goldstein contributed to this article.

-Vivien Lou Chen

 

(END) Dow Jones Newswires

01-10-22 1511ET

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