S&P 500 ends in second weekly loss on fears Fed will keep rates high

A broad index of US stocks fell for the second week in a row as robust economic data continued to fan investor fears that the Federal Reserve will need to apply a brake to the US economy for longer than anticipated just last month.

The blue-chip S&P 500 index closed down 0.3 per cent on Friday, leading to a 0.3 per cent loss for the week. The tech-heavy Nasdaq Composite shed 0.6 per cent on Friday, but gained per 0.6 cent across the past five sessions.

The decline on Friday added to the S&P’s worst day in a month on Thursday, underscoring the readjustment in investor expectations on US interest rates after consumer and wholesale price data published this week came in hotter than expected.

Selling also extended into oil markets with West Texas Intermediate, the US crude benchmark, dropping 2.7 per cent to $76.34 a barrel.

Retail sales data released this week also showed a sharp jump for January, another sign the US economy was still strong despite the Fed’s year-long attempt to curb growth and bring down inflation through an aggressive campaign of rate increases.

“If inflation continues to come in strong it will keep the Fed convinced they need to keep raising rates, and if the data continues to hold up they might hike even further,” said Andrew Hollenhorst, Citi’s chief US economist.

Jobless claims filed in the last week came in lower than economists had expected at 194,000 new applications, a sign that the labour market is still tight despite tougher borrowing conditions.

Yields on 10-year US Treasuries this week closed in on their highest point since late December, but on Friday the 10-year yield fell 0.04 percentage points to 3.82 per cent. Yields on the two-year Treasury note, which is highly sensitive to the expected path of interest rates, reached 4.63 per cent, its highest point since November. Yields rise when bond prices fall.

“The recent strong economic/inflation data has pushed Treasury yields back up to a level that makes it very tough for the stock market to stay up at its current level,” said Matt Maley, chief market strategist at Miller Tabak + Co. “When you combine higher yields with the lower earnings estimates we now have for 2023, it creates some more renewed headwinds for a stock market that is still quite expensive.”

Meanwhile, more US central bank officials have come out in favour of staying the course on high interest rates. Loretta Mester, president of the Cleveland Fed, on Thursday said she saw a “compelling case” for a half percentage point rise at the next meeting, and St Louis Fed president James Bullard also said he would not rule out an increase of the same size.

Fed governor Michelle Bowman and Thomas Barkin, president of the Richmond Fed, on Friday also spoke in support of higher rates. “We’re not finished yet. We haven’t beaten inflation,” Bowman said, according to Bloomberg.

The dollar index, which measures the greenback against a basket of six peer currencies, was flat, while the euro was up 0.2 per cent against the greenback.

In Europe the benchmark Stoxx 600 dipped 0.2 per cent, off its lows from earlier in the session, while Germany’s Dax fell 0.3 per cent lower. France’s CAC 40 finished 0.3 per cent lower, after reaching a record high on Thursday.

Yields on 10-year German Bunds gave up gains to ease 0.07 percentage points to 2.42 per cent as investors debated whether the European Central Bank would follow the Fed in raising rates. The moves came after Isabel Schnabel, one of the bank’s executive board members, told Bloomberg she saw risks that markets will underestimate inflation.

Hong Kong’s Hang Seng index dropped 1.3 per cent, while the Chinese CSI 300 fell 1.4 per cent.