On Thursday, stock markets experienced a downturn, erasing gains from earlier in the day as investors braced for the upcoming employment data release on Friday.
The Dow Jones Industrial Average saw a significant drop of 530 points, or 1.4%, ending the day under the 39,000 mark, a level not seen since the latter half of March, after fluctuating by 800 points throughout the trading session.
The S&P 500 and the Nasdaq Composite also faced setbacks, declining by 1.2% and 1.4% respectively.
Comments from Neel Kashkari, President of the Minneapolis Federal Reserve, contributed to the market’s unease. He mentioned on Thursday that the central bank might maintain current interest rates throughout the year if inflation does not subside, unsettling investors already anxious about a potential delay in rate reductions by the Fed.
This downturn is part of a challenging beginning to the second quarter, following a strong start to the year, the best since 2019 for stocks. The S&P 500 has fallen by 2% over the week, despite recovering some losses on Wednesday. On Tuesday, the yield on the 10-year US Treasury bond surged to its highest point since the previous November, and prices for gold and oil have been on the rise.
Three primary concerns are unsettling investors:
Persistent inflation is a key issue. The Personal Consumption Expenditures price index, which the Fed prefers for measuring inflation, increased by 2.5% in the year ending in February. Although this was expected, it marked an acceleration from January’s 2.4% rise.
Market participants are worried that ongoing inflation might prevent the anticipated interest rate cut in mid-2023. Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management, expressed skepticism on Monday about an early summer rate adjustment by the Fed.
Yields on long-term bonds, which affect stock market dynamics, have climbed this week. Although there was a slight decrease on Thursday, yields are still high, with the 10-year Treasury yield dropping to 4.31%, down from a four-month peak.
Federal Reserve officials have been adopting a more cautious tone. During last month’s policy meeting, some indicated fewer rate cuts in 2024 than previously projected in December.
• Fed Chair Jerome Powell emphasized at a San Francisco Fed event and a Stanford University speech that rate reductions are not on the immediate horizon. • Loretta Mester, President of the Cleveland Fed, dismissed the possibility of a rate cut in the upcoming month. • Raphael Bostic, President of the Atlanta Fed, expects a single rate reduction in the last quarter of the year, acknowledging the persistent nature of inflation towards the 2% target.
Rising commodity prices, particularly oil, have added to market pressures. Escalating tensions in the Middle East and production reductions by OPEC+ have led to a surge in oil prices. The US benchmark, West Texas Intermediate crude, closed at $86.59, while Brent crude reached $90.65.
Bank of America analysts predict that oil prices might hit a peak of about $95 a barrel during the summer due to these factors.
Gold prices have also increased, as investors turn to the precious metal as a hedge against inflation and a safe investment option amidst economic uncertainties. Gold futures recently settled at $2308.50 an ounce, slightly below a record high.
