Wall Street slipped in the first trade in stocks on Monday after a report sparked speculation that the Federal Reserve could slow the economy a little harder.
The S&P 500 was down 0.6% in early trade. There was no action on Friday, when the US government said job growth across the economy had slowed slightly more-than-expected last month but remained resilient. The Dow Jones Industrial Average fell 53 points, or 0.2%, to 33,432 at 9:45 a.m. Eastern time, while the Nasdaq Composite was 1.1% lower.
Stocks caught up to the bond market, where yields rose on Friday on expectations that jobs data would prompt the Fed to hike interest rates at its next meeting. The Fed has been raising rates at a rapid pace over the last year in hopes of bringing down inflation.
Higher interest rates can undercut inflation, but only by slowing down the entire economy in one fell swoop. This increases the risk of a recession in the future and drags down stocks, bonds and other assets.
Traders are betting on a roughly 70% chance that the Fed will hike its federal funds rate by 0.25 percentage point to a range of 5% to 5.25% in May, according to data from CME Group. A day before Friday’s jobs report, they saw an approximate coin toss chance that the Fed would stay pat at its next meeting.
The Fed has hiked rates at each of its meetings over the past year, raising them from near zero in early 2022.
In the bond market, government bond yields were relatively stable. The 10-year yield, which helps set interest rates on mortgages and other major loans, slipped to 3.40% from 3.41% on Friday.
While the jobs report raised expectations for another rate hike, it also showed that the job market was resilient enough to bolster some investors’ hopes that the Fed could create a so-called “soft landing” for the economy. Here, the Fed manages to raise interest rates just enough to choke the economy, but not enough to trigger a severe recession.
However, the prevailing bet in the bond market seems to be that the economy will slow down enough for the Federal Reserve to cut interest rates this summer. Lower interest rates can ease the pressure on the economy and financial markets, but could also give inflation more leeway. The Fed has so far said it does not see any rate cuts this year.
Another report coming out on Wednesday could have a bigger impact on expectations for the Fed. At that time, the US government will release its latest monthly update of consumer-level prices across the economy. Economists expect inflation to have slowed over the past month but remains well above the Fed’s target.
Also this week, earnings report season begins for the largest US companies. Delta Air Lines, JPMorgan Chase and UnitedHealth Group will be among the first of the S&P 500 companies to report how much profit they made through the first three months of the year.
Expectations are low, with analysts forecasting the sharpest fall in earnings per share since the pandemic hit the economy in spring 2020.
Analysts are forecasting a particularly sharp drop in earnings at technology companies, which are the third worst among the 11 sectors that make up the S&P 500, according to FactSet.
Tech stocks are also typically among the hardest hit by higher interest rates, which often hurts the riskiest, highest-growth stocks the most.
Apple and Microsoft were among the heaviest weights in the S&P 500 on Monday. Apple lost 2.7% and Microsoft lost 2%.
Tesla fell 3.7% in its first trade after the electric-vehicle company cut prices across its U.S. model lineup for the third time this year. It’s apparently trying to attract more buyers as interest rates rise, making car loans more expensive.
In overseas markets, equities were mixed across Asia. Japan’s Nikkei 225 rose 0.4% after the Bank of Japan’s new governor signaled he is not planning drastic changes to its policy of ultra-low interest rates.
In Europe, many stock markets were closed.
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