Global stocks pulled back on Tuesday as hopes faded that major central banks would pivot to less aggressive interest rate hikes or even cuts later this year. Investors took a more cautious stance amid worries over still high inflation and signs of weakness in the Chinese economy.
Wall Street Falls As Treasury Yields Rebound
Major U.S. stock indexes closed lower to start 2024 after posting big gains in the final two months of 2023. The pullback came as Treasury yields rebounded across the board, reducing the valuation case for equities.
The Dow Jones Industrial Average fell 10.88 points, or 0.03%, to 33,136.37. The S&P 500 lost 0.40% to 3,824.14, and the Nasdaq Composite dropped 0.76% to 10,386.98.
Declines were broad-based, with all 11 S&P 500 sectors closing in the red. Consumer discretionary and communication services stocks were among the biggest drags.
Behind the selling was a backup in Treasury yields, led by the 2-year rate rebounding sharply from a three-month low. This dented hopes that the Federal Reserve could start cutting interest rates later this year to boost economic growth.
Most Fed policymakers still expect rates will need to go higher this year, even after the central bank raised its benchmark rate to a range of 4.25% to 4.5% in December.
Major Indexes 12/30/2022 Close 1/3/2023 Close Change
Dow Jones 33,147.25 33,136.37 -0.03%
S&P 500 3,839.50 3,824.14 -0.40%
Nasdaq 10,466.48 10,386.98 -0.76%
Asia Shares Fall As China Data Disappoints
Asian shares declined on Wednesday following losses on Wall Street amid fading optimism over the prospect for interest rate cuts. Fresh evidence of a weakening Chinese economy also weighed on sentiment.
China’s business activity contracted further in December, private surveys showed, as strict COVID curbs disrupted production and dampened demand. Both the official manufacturing and services PMIs unexpectedly fell into contraction territory last month.
Japan’s Nikkei 225 dropped 1.5% while Hong Kong’s Hang Seng index slumped 2.4%. Chinese shares opened lower with the Shanghai Composite down 0.9%.
Major Indexes 1/3/2023 Close Change
Nikkei 225 25,716.86 -1.45%
Hang Seng 19,597.31 -2.42%
Shanghai Composite 3,089.31 -0.86%
The weaker Chinese data reinforced global growth worries, making it harder for investors to bet on rate cuts by central banks. Aggressive Fed tightening remains the dominant driver of global asset prices.
Most traders expect the Fed to raise rates by another 50 basis points in early February before slowing the pace of hikes. Still, some big investment banks see rates peaking at 5%-5.25% or higher.
What To Watch
All eyes will now turn to key U.S. jobs data at the end of this week that could influence the Fed’s policy trajectory. Friday brings the December nonfarm payrolls report, with economists forecasting the addition of 200,000 jobs during the month.
Wage growth and the unemployment rate will also be in focus. Signs of persistent labor market tightness could cement expectations of higher interest rates for longer.
On the earnings front, major U.S. banks kick off the new reporting season later this month. Financial stocks surged over 20% in 2022 despite the weak broader market. Investors will look for signs of slowing loan growth and credit quality issues that could affect banks’ bottom lines.
Ongoing supply chain problems, soaring operating costs, and waning consumer demand threaten profit margins for companies across sectors. Earnings growth is seen slowing dramatically after last year’s post-pandemic surge.
In China, the path of reopening the economy following the abrupt abandonment of zero-COVID policies will drive markets. However, the rollback of pandemic restrictions could bring further disruption and uncertainty in the near term.
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