US stocks, Treasury bonds, and oil have been under pressure recently as Wall Street faces massive headwinds, which scare away traders and investors.
All major equity averages have been losing ground this week, led by the tech-heavy Nasdaq.
Bond prices have been moving in the same direction, with bond yields reaching new highs. For instance, the 10-year Treasury bond yield crossed 4.4% on Thursday morning, up from 2.7% a year ago—even oil, which was on the rise early in the week, headed south, too.
Thanks to several headwinds, which turn risk off on Wall Street.
Top on the list of these headwinds is a hawkish Fed, which made it clear that it has yet to hike interest rates in its recent meeting.
That means stocks and bonds will face competition from money market funds currently yielding 5.5%.
Meanwhile, higher interest rates make it more likely that the U.S. economy will head for a hard landing rather than a soft landing, which is harmful to energy consumption.
“There was no change to the Fed Funds Target Rate today, very much in line with market expectations,” David Keller, Chief Market Strategist at Stockcharts.com, told International Business Times.
“Powell’s comments this afternoon stressed that the Fed is prepared to take additional action later this year, suggesting a strong likelihood of one more rate hike at the November or December meeting.”
David I. Kass, Clinical Professor of Finance at University of Maryland Robert H. Smith School of Business, provides further insight into the recent FOMC decision.
“Although the FOMC voted 12-0 to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent as expected, its statement (“inflation remains elevated”) and Chair Powell’s subsequent press conference was hawkish in tone,” he told IBT.
“The quarterly economic projections of Federal Reserve Board members and Federal Reserve Bank presidents revealed that there was likely one more 1/4 percent rate increase this year and only two 1/4 percent rate cuts in 2024.”
David Russell, Global Head of Market Strategy at TradeStation, thinks that the Fed’s statement keeps them data-dependent, which could be a positive if shelter costs continue to ease.
“Jerome Powell isn’t ready to back down yet, but markets might look past the rhetoric,” he said. “Investors know he’s wary of declaring victory against inflation after his infamous transitory call two years ago.”
Keller expects rising interest rates to continue to provide a massive headwind to growth sectors like Technology and Communication Services.
Another headwind is the UAW strike, which could set a precedent for supply cause disruptions and higher wages, ending in the last thing the Fed would like to see: A wage-price spiral.
“The UAW strike has the potential to cause inflation to rise, both through a supply shortage of vehicles while factories are closed and after the strike ends if workers get big pay raises, as that will be passed onto consumers in higher prices for cars,” Anthony Denier, CEO of Weibull told IBT.
“With inflation already a big issue for U.S. monetary policymakers, lowered inventories would likely not only raise new car prices but used car prices as well, which could potentially be a big boost to already dangerous inflation,” added Rod Skyles, Blogger with The Unconventional Economist. “Monetary policy would be orced to shift back into hawkish mode, raising rates and reducing the money supply even further. “
A third headwind is the possibility of the shutting down of the government at the end of the month, which will cause further disruptions in the economy and magnify Wall Street uncertainties.
“If Congress should follow through on its threat to shut down the government, this could have unexpected consequences,” said Denier. “If it lasts more than a month, this will prevent the government from producing the economic reports that the Fed relies on to determine monetary policy at its next meeting.”
Still, there’s the escalation of tensions between the U.S. and China and the persistence of the Russian-Ukraine war. They pose a significant threat to globalization, which could add to price pressures, undercut economic growth, and hurt the earnings of U.S. corporate giants.