US Equities Drop on Renewed Inflation Pressures, Yields Rise

US Equities Drop on Renewed Inflation Pressures, Yields Rise

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Key Takeaways

• Jerome Powell confirms the Fed will keep policy unchanged
• Stocks sell-off as Treasury yields rise

Government bond yields are on the rise again in another wild turn in the markets this week. Federal Reserve Chairman Jerome Powell delivered a speech yesterday which once more invoked fears in investors that the central bank could be acting too slowly while inflationary pressure is rising quicker than anticipated.

In an online appearance, Fed Chair Jerome Powell reiterated the central bank’s decision to maintain the ultra-loose monetary policy for the foreseeable future and adjust its position according to the path of the economy. Mr. Powell vowed to keep easy-money policies going even as the economy improves from the pandemic and inflation begins to rise. His comments triggered a sell-off in long-term US Treasury debt and equities across all benchmark indexes. Chairman Powell’s remarks, however, did not bring anything new to the table but the market was spooked and that resulted in a heavy wave of selling.

The tech-heavy Nasdaq Composite index slid 2.11%, or 274.28 points, to a close of 12,723. The S&P500 closed lower by 1.34%, or 51.25 points, ending the session at 3,768 while the Dow Jones Industrial Average dropped 1.11%, or 345.95 points, to a close at 30,924. Equity futures before Friday’s session remain negative.

Fed Chair Jerome Powell already eased market fears of rising inflation in a previous speech which helped buoy the tech-heavy Nasdaq Composite, which was down 3% before the speech but managed to close almost unchanged on the day as market participants felt confident to stay invested inequities.

Anticipation for US Employment Data

The difference this time is that the backdrop for financial markets has changed quite a lot since he spoke last week. Over the past few days, market participants witnessed a sizeable spike in Treasury yields and US borrowing costs more broadly. These types of sudden and sharp moves turned out to be destabilizing for the equity markets, considered relatively riskier than other assets. Against this backdrop, Fed Chair Powell did not deliver any explicit pushback against these interest rate moves.

On the fiscal side, the Senate is moving forward with President Biden’s stimulus package. Investors have been more or less pricing in this package for the past few months. Expectations started building up after Democrats won both Senate seats in the Georgia election that gave them control over government spending powers. The anticipated injection of $1.9tn into the economy is adding to inflationary pressures which leads to the question of how is the Federal Reserve going to react to the potential surge in inflation that could come later in the year.

Investors, however, are expecting the stimulus package to charge the pandemic-stricken economy and push it forward on the path towards recovery. After the US economy lost 227,000 jobs in December, January’s payroll data showed a modest rebound of 49,000 jobs. Economists expect the pickup in jobs to continue through February. The monthly US employment report will indicate today if the economy is accelerating.