Hawkish Fed Minutes Contribute To Sell-Off On Wall Street

With traders reacting negatively to the minutes of the latest Federal Reserve meeting, stocks moved notably lower during trading on Wednesday. The tech-heavy Nasdaq showed a particularly steep drop, extending the sharp pullback seen in the previous session.

After reaching a new record intraday high, the Dow turned lower following the release of the Fed minutes, slumping 392.54 points or 1.1 percent to 36,407.11. The Nasdaq plunged 522.54 points or 3.3 percent to 15,100.17 and the S&P 500 tumbled 92.96 points or 1.9 percent to 4,700.58.

The sell-off on Wall Street came as the Fed minutes seemed to have a more hawkish tone, raising concerns the central bank will be more aggressive than anticipated.

According to the minutes of the December 14-15 meeting, members of the Fed are preparing to begin reducing the size of the central bank’s approximately $8.8 trillion balance sheet soon after raising interest rates.

While the previous balance sheet runoff commenced almost two years after policy rate liftoff, participants judge that the appropriate timing this time around would likely be closer to that of policy rate liftoff.

“They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization,” the minutes said.

The discussions about reducing the size of the central bank’s balance sheet came as the Fed also agreed to accelerate the pace of reductions to its asset purchases, with the program currently slated to come to an end in mid-March.

Many economists expect the Fed to begin raising interest rates as soon as the asset program ends, with CME’s FedWatch Tool currently indicating a 71.0 percent chance of a rate hike at the March 15-16 meeting.

Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics, said the minutes reflected the Fed’s “rising discomfort with elevated inflation and stronger confidence in the recovery of the economy and the labor market despite the downside risks due to the Omicron variant.”

“The hawkish tone of the minutes underscores the likelihood of three rate hikes this year, but also signals a reduction in the size of the balance sheet that could start by mid-2022,” she added.

Meanwhile, traders have largely shrugged off a report from payroll processor ADP showing much stronger than expected private sector job growth in the month of December.

ADP said private sector employment spiked by 807,000 jobs in December after jumping by a revised 505,000 jobs in November.

Economists had expected private sector employment to increase by 400,000 jobs compared to the addition of 534,000 jobs originally reported for the previous month.

Sector News

Software stocks extended a recent downward move on the day, dragging the Dow Jones U.S. Software Index down by 4.5 percent to its lowest closing level in three months.

Significant weakness was also visible among semiconductor stocks, as reflected by the 3.2 percent plunge by the Philadelphia Semiconductor Index. The index reached a record intraday high in the previous session.

Biotechnology stocks also saw considerable weakness, with the NYSE Arca Biotechnology Index plummeting by 3.1 percent.

Commercial real estate, networking and airline stocks also moved notably lower, reflecting the broad based weakness that emerged on Wall Street.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower on Wednesday, although Japan’s Nikkei 225 Index bucked the downtrend and inched up by 1 percent. China’s Shanghai Composite Index slumped by 1 percent and Hong Kong’s Hang Seng Index tumbled by 1.6 percent.

Meanwhile, the major European markets moved to the upside on the day. While the U.K.’s FTSE 100 Index edged up by 0.2 percent, the German DAX Index and the French CAC 40 Index climbed by 0.7 percent and 0.8 percent, respectively.

In the bond market, treasuries extended a recent downward move in reaction to the Fed minutes. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 3.7 basis points to a nine-month closing high of 1.705 percent.

Looking Ahead

Trading on Thursday may be impacted by reaction to reports on weekly jobless claims, the U.S. trade deficit, factory orders and service sector activity.

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