The U.S. stock market closed lower on Wednesday, following a rise in Treasury 10-year yields.
The Dow Jones ended the day at 30,439.07, falling 0.28 percent or 84.73 points. The S&P closed at 3,695.89, down by 0.65 percent or 24.09 points. The Nasdaq concluded the trading day at 10,684.07, slipping 0.82 percent or 84.73 points. The three indices previously earned gains for two consecutive trading days.
IG North America CEO JJ Kinahan said that although several companies had reported strong quarterly earnings, which contributed to the gains on the two first trading days this week, the bonds still weighed “heavily” on the stock market.
"Ultimately earnings drives stocks but when they are being overshadowed it is tough to have that optimism, but ultimately good earnings will lead to stocks going higher, it is a matter of how much the macroeconomic picture is going to continue to hurt those earnings,” Kinahan said.
The U.S. 10-year Treasury yield reached 4.136 percent, its highest rate since July 2008. The increase affected the stocks of rate-sensitive industries, like real estate. Within the S&P index, the energy industry was the only sector to close in positive territory on Wednesday.
Investors sold their bonds despite the newly released U.S. housing report showing softening housing market situation. Data revealed that U.S. housing starts dropped to an annual rate of 1.439 million units in September, falling by 8.1 percent. Analysts explained that the Federal Reserve’s upcoming interest rate increase had caused the selloff.
Evercore ISI fixed income strategist Stan Shipley said that the 10-year yield would likely peak within the first half of 2023 at around 4.6 percent and remain at that range throughout the year.
A number of analysts have advised investors to wait for the Fed to stop its consecutive rate hikes. CNBC Mad Money host Jim Cramer said that “there’s no give without a get.” He argued that despite the interest rate hikes hurting investors, they would be rewarded by lower rates once inflation is under control.
The former money manager warned investors against expecting a near-future bullish trend when encountering temporary rallies in the stock market unless data shows that the economy has slowed down.
Fed struggling to tame inflation
Fed officials have generally shared similar opinions about raising interest rates in the fight against inflation. Neel Kashkari, chief of Fed Minneapolis, referred to the strong job market demand in September, which showed that the unemployment rate went down to 3.5 percent, lower than the Fed’s prediction. According to Kashkari, the driving factors behind the current inflation have yet to peak.
Kashkari’s “best guess” is that if the driving factors of inflations level out in the next few months, the Fed will pause its aggressive rate hikes “sometime next year.”
An economic survey by the Fed revealed that although inflation had cooled down in several areas, consumer price pressures remained “elevated.” Consumer prices are projected to continue rising.
In the next FOMC meeting, the Fed is expected to raise rates by another 75 basis points. Fed officials reportedly target an interest rate of up to 4.6 percent by 2023.