Wall Street stocks fell on Thursday as investors weighed the implications of the Federal Reserve’s latest policy statement, which signaled a possible tapering of its bond-buying program and a sooner-than-expected interest rate hike. The Dow Jones Industrial Average (^DJI) dropped 0.57%, while the S&P 500 (^GSPC) and the Nasdaq Composite (^IXIC) lost 0.70% and 1.06%, respectively.
Fed hints at tapering and rate hike
The main catalyst for the market sell-off was the Fed’s announcement on Wednesday, which indicated that the central bank is considering reducing its $120 billion monthly asset purchases as soon as November, and raising its benchmark interest rate by late 2023 or early 2024. The Fed also revised up its inflation and growth forecasts for this year and next, reflecting the strong recovery from the pandemic-induced recession.
The Fed’s hawkish stance surprised some investors who expected a more gradual and cautious approach to monetary policy normalization, given the uncertainty caused by the Delta variant of COVID-19 and the supply chain disruptions. Some analysts warned that the Fed’s move could dampen consumer and business confidence, and slow down the economic momentum.
The Fed’s announcement was a wake-up call for the market, which had been complacent about the risks of inflation and tighter monetary policy1. The Fed’s shift also triggered a rise in Treasury yields (^TNX), which put pressure on growth-oriented sectors such as technology and consumer discretionary. Apple (AAPL), for instance, fell 2.6% on Thursday, after reports that China has banned government officials and state-owned companies from using its iPhone1.
China’s slowdown weighs on global demand
Another factor that weighed on the market sentiment was the weak trade data from China, which showed that its exports grew at a slower pace than expected in August, while its imports contracted for the first time since February2. The data suggested that China’s economy is losing steam amid the Delta variant outbreak, regulatory crackdowns, and power shortages.
China’s slowdown has implications for the global economy, as it is a major source of demand for commodities, consumer goods, and intermediate inputs. Some analysts said that China’s weakness could be a “top risk” for the US economy3, as it could hurt US exporters, multinationals, and supply chains. Moreover, China’s slowdown could also affect other emerging markets that rely on China for trade and investment.
The market is concerned about the potential spillover effects of China’s slowdown on the global growth outlook. The trade data from China added to the gloomy picture painted by other recent indicators, such as the purchasing managers’ indexes (PMIs), which showed that China’s manufacturing and services sectors contracted in August. The market is also awaiting China’s retail sales and industrial production data for August, which are due next week.
US jobless claims offer some relief
A bright spot in the market was the better-than-expected US initial jobless claims data, which showed that the number of Americans filing for unemployment benefits fell to a new pandemic low of 310,000 last week. The data indicated that the US labor market is continuing to recover despite the Delta variant surge, and that employers are reluctant to lay off workers amid labor shortages.
The jobless claims data also eased some of the concerns raised by the disappointing August jobs report, which showed that the US economy added only 235,000 nonfarm payrolls last month, well below the consensus estimate of 733,000. The jobs report was seen as a key factor in influencing the Fed’s decision on tapering and rate hike timing.
The jobless claims data provided some relief to the market, as it suggested that the US economy is still resilient and capable of weathering the Delta variant headwinds. The market is also looking forward to other upcoming economic data, such as the retail sales and consumer sentiment reports for August, which will offer more clues on the health of the US consumer sector.
