Nasdaq records worst day in 11 months, S&P 500 slips 1.9% after Fed minutes surprise with balance sheet reduction talks

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Shares ended sharply lower on Wednesday after the release of the minutes of the Federal Reserve’s last policy meeting in 2021 showed talks of a potentially faster pace of massive central bank balance sheet reduction and rate hikes. .

Shares tumbled following the release of the minutes of the last Federal Open Market Committee meeting in December, which revealed a more hawkish tone from Fed officials grappling with what some have described as inflation levels similar to the 1980s.

The minutes revealed strong discussions among some Fed officials around the central bank that could hike rates faster and shrink its current balance sheet by $ 8.8 trillion faster than expected to help make in the face of the rising cost of living.

Read: Fed minutes suggest officials ready to step away from easy political stance

The market reaction to discussions of faster steps towards policy normalization surprised some on Wall Street. “Maybe that confirmed what people worried about before, and now it’s available in black and white, in print, for everyone to see,” said John Carey, director of equity income at Amundi US.

“You can’t doubt it’s going to happen at this point. This reality is sinking.

See: Here’s what equity and bond market strategists say after Fed minutes point to the end of the easy money

At the December 14-15 meeting, Fed policymakers agreed to step up the gradual reduction in monthly central bank asset purchases.

But Carey also expects the Fed to remain cautious about excessively tightening monetary policy during its battle with inflation, particularly if the surge in COVID-19 infections hampers the economy, with some school districts highlighting In-person classes are paused and difficulties are emerging for industry conferences and other major events, including the Grammy Awards, nearly two years after the start of the pandemic.

“The problem could be solved if the economy slows down with the omicron,” Carey said of inflationary pressures.

Meanwhile, the minutes of the Fed meeting precipitated a wreck in the SPS500.45 tech-related sectors,
-3.13%
already gained momentum on Wednesday. Shares of Google’s parent company, Alphabet Inc. GOOGL,
-4.59%
closed 4.6% lower, down more than 7.6% from its Nov. 18 closing high of $ 2,996.77.

Rising government bond yields also contributed to the pressure on tech games, as investors took into account the prospect of higher borrowing costs if the Fed raised interest rates as much as three. times as planned this year.

On the other hand, financials SP500.40,
-1.25%,
which benefit from a bullish interest rate environment, were still up sharply over the week.

The 10-year Treasury yield TMUBMUSD10Y,
1.704%
jumped nearly 20 basis points in the first three trading days of 2021.

“I think a lot of investors are realizing that now is not the time to step outside,” Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said in a telephone interview.

He pointed to the “revaluation of higher valued stocks” in recent days and continued to sell in the tech sector on Wednesday. “At some point, though, I think tech investors are going to champion some of these names, but we’re not at that point yet,” he said.

Over the past two trading days, the S&P 500 SP500PV Stock Index,
-0.56%
outperformed the S&P 500 SP500PG growth index,
-3.81%
by 4.31 percentage points, marking the strongest two-day outperformance since November 10, 2020.

On the economic and political fronts, a report on the private wage bill showed that 807,000 jobs were created in December, according to the ADP national employment report, higher than forecast for a gain of 375,000, based on average estimates from economists surveyed by the Wall Street Journal. .

“Jobs, jobs, jobs. Now through Friday, Wall Street will be obsessed with employment reports and their likely influence on inflation and interest rates, ”wrote Sam Stovall, chief investment strategist at CFRA Research, in comments sent by email.

Policy makers are using the ADP report to get an early read of the Labor Department’s report on private wages, which is expected to be released in about 48 hours. The private sector report recently has not been an accurate predictor of Friday’s jobs report.

However, the ADP report is being watched as investors will be more tuned in to the health of the labor market during the omicron variant surge. The job market and the outlook for inflation are two factors Fed policymakers will be watching closely as they prepare for the new year.

Separately, the final reading for the IHS Markit Service Purchasing Managers Index for December stood at 57.6, down from 58 in November, but mostly in line with a previous estimate.

Which companies were the center of attention?
  • The high-flying automotive sector was in the spotlight, after rallies for You’re here TSLA and Ford Motor Co. F on successive days. General Motors GM unveiled an all-electric Chevrolet Silverado on Wednesday, while Sony SONY joined the Tokyo trade after setting up an electric vehicle unit. But GM shares closed 4.6% lower, Ford fell 2.7% after a sharp rise on Tuesday, and Tesla shares fell 5.4% as Wall Street collapsed late in the day. afternoon.

  • Actions of Beyond the meat
    BYND,
    -5.08%
    were the center of attention after it said a plant-based fried chicken product would arrive at KFC U.S. locations next week. Its stock fell 5.1%.

  • Boeing Co. BA actions,
    -0.26%
    lost 0.3% even as the airline industry ordered the airline company’s 737 MAX jet. Wednesday, the Allegiant Travel ALGT,
    -8.83%
    The airline Allegiant Air has ordered 50 MAX jets with an option to purchase 50 more.
How did the other assets behave?
  • The yield on the 10-year T-bill TMUBMUSD10Y rose 3.7 basis points to 1.703%, the highest since April 5, 2021. Debt yields and prices move opposite each other .

  • The ICE US Dollar DXY index lost 0.1%.

  • GC00 gold futures closed higher with February’s contract rising 0.6% to $ 1,825.10 an ounce on Comex, but fell after Fed minutes . West Texas Intermediate crude for February delivery CLG22, the US benchmark, rose 1.1% to $ 77.85 per barrel on the New York Mercantile Exchange.

  • Bitcoin BTCUSD fell 5%.

  • The Stoxx Europe 600 SXXP index closed less than 0.1%, while London’s FTSE 100 UKX ended its session up 0.2%.

  • The Shanghai Composite SHCOMP fell by 1% and the Chinese CSI 300,000,300,
    -1.01%
    fell 1%, while the Hang Seng HSI index fell 1.6% in Hong Kong and Japan’s Nikkei 225 NIK edged up 0.1%.

—Steve Goldstein contributed to this article

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