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Hawkish Fed sends stocks & bonds lower
Global equities recorded a second week of heavy losses after the Fed revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow Jones Industrial Average fell to new intraday lows since late 2020, while the S&P 500 Index and Nasdaq Composite managed to stay slightly above their bottoms in mid-June 2022. The VIX index, so-called fear gauge, rose sharply at the end of the week. The Nasdaq Composite Index underperformed for the second consecutive week and briefly fell to a level more than one-third below its January record high.
The two-year U.S. Treasury note yield rose above 4.10%—its highest level since October 2007—and the 10-year U.S. Treasury note yield jumped briefly to 3.77%—its highest mark since November 2008. The STOXX Europe 600 Index ended the week down 4.37%, dropping to the lowest levels in more than a year. Yields on German 10-year government bonds rose to fresh decade highs while UK gilt yields jumped sharply on the prospect of escalating public debt and a sharp increase in interest rates after the government slashed taxes by the most since 1972 to support the economy. The UK pound fell to USD 1.09—a 37-year low. The RBA, SNB and BoE lifted interest rates while Eurozone business activity contracted for a third consecutive month in September as the economic downturn deepened. Cryptocurrencies tumbled.
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U.S. stock indexes finished the holiday-shortened week higher, boosted by dovish comments from some Fed officials and several weaker-than-expected economic reports that seemed to reinforce the idea that a December rate cut remains on track. Small-cap stocks outperformed their large-cap peers, as the Russell 2000 Index advanced 5.5%. The Nasdaq Composite also posted strong returns, rebounding from the prior week’s sell-off as concerns regarding elevated valuations and spending on AI appeared to take a back seat to optimism around the growth potential from the technology. In economic news, U.S. retail sales increased by 0.2% in September (below +0.4% estimates). September PPI rose 0.3% in September, in line with estimates.