Stocks plunge as bond yield soars
NEW YORK: Stock markets plunged and bond yields soared on Friday after US data showing the strongest annual wage growth since 2009 rattled investors who fear accelerating inflation will usher in more interest rate hikes than expected this year. Yields on the benchmark 10-year US Treasury note shot up to a four-year high just minutes after the release of a Labor Department unemployment report for January that underscored strong momentum in the US economy.
A gain of 200,000 jobs last month and annualized increase in average hourly earnings to 2.9 percent led the dollar to surge against the yen, the euro and a basket of six currencies. The price of the US 10-year note later fell further, pushing the yield up as high as 2.854 percent from 2.773 percent late on Thursday. The rapid rise in the 10-year note the world benchmark for corporate lending sent shockwaves through a market grown accustomed to low inflation and a steady tick higher in stocks. “It feels as though the grand era of interest rates below 3 percent will soon be in the rear-view mirror,” said Mike Terwilliger, portfolio manager of Resource Liquid Alternatives for the Resource Credit Income Fund in New York.
While wage growth may be good for the economy it could spell trouble for the bond market as inflation portends rate hikes, which augur a repricing of fixed income, he said. The spike in bond rates made everybody nervous, said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas. But the stock sell-off was long overdue, he said. “The correction looks a whole lot worse than maybe it is because of the fact that we hadn’t had a correction for so long that we all got used to watching this market go up,” he said.
Strong labor market
Art Hogan, chief market strategist at Wunderlich Securities in New York, said next week investors will kick themselves for selling assets for all the wrong reasons in a sell-off akin to throwing the baby out with the bath water. “Next week we will start sorting and saying, ‘Wait a minute. We sold financials because interest rates are going higher?’” It was the biggest single-day percentage decline for the benchmark S&P 500 index since September 2016 and for the Dow since June 2016. The S&P 500 is still up 3.2 percent for the year.
A stock slide of at least 1 percent in Europe later accelerated on Wall Street as the strong labor market data boosted chances the Federal Reserve will raise rates four times this year instead of the three hikes analysts had expected. “What is good for the average American worker ends up being negative for stocks because it increases the odds of further rate hikes,” said Michael Antonelli, managing director of institutional sales trading at Robert W Baird in Milwaukee. The Dow Jones Industrial Average fell 665.75 points, or 2.54 percent, to 25,520.96. The S&P 500 lost 59.85 points, or 2.12 percent, to 2,762.13 and the Nasdaq Composite dropped 144.92 points, or 1.96 percent, to 7,240.95. Disappointing results from some of the largest U.S. companies also weighed on stocks. Oil majors Exxon and Chevron fell 5.1 percent and 5.6 percent, respectively, after reporting lower-than-expected quarterly profits. Google-parent Alphabet fell 5.3 percent after an earnings miss and Apple fell 4.3 percent as investors focused on its muted forecast rather than strong iPhone prices. — Reuters