U.S. stocks slipped on Thursday after a U.S. Treasury auction drove bond yields higher in the market, putting pressure on Wall Street.
The S&P 500 showed mixed performance in the morning and later fell by 0.62 percent to close at 4,349.61, marking its first decline in five days. The Dow Jones Industrial Average also dropped by 173.73 points or 0.5 percent to 33,631.14, while the Nasdaq Composite dipped by 85.46 points or 0.6 percent to 13,574.22.
Recently, the stock market closely followed the bond market. The disappointing results from a 30-year Treasury bond auction pushed Treasury yields higher. As a result, stock prices lowered, and borrowing costs increased, slowing the economy.
Since Thursday morning, yields have been increasing due to higher-than-expected consumer-level inflation. This was mainly due to an unexpected jump in rental costs last month. According to the Labor Department’s report, the annual increase in consumer prices, excluding volatile food and energy components, was the lowest in two years.
The 10-year Treasury yield increased to 4.728 percent, its highest level since last Friday, from 4.56 percent on Wednesday. Meanwhile, the two-year Treasury yield rose to 5.07 percent from 4.99 percent.
Another report from yesterday morning revealed that the number of U.S. workers who applied for unemployment benefits was slightly lower than expected. This reflects a strong job market with fewer layoffs but might contribute to upward inflationary pressure.
Most S&P 500 sectors decline
Among the S&P 500’s 11 major industry sectors, materials declined the most by 1.5 percent. Rising yields put pressure on rate-sensitive sectors, with utilities and real estate down 1.5 percent and 1.3 percent, respectively.
Homebuilding stocks dropped after the data and further declined as bond yield increased. The iShares Home Construction ETF experienced its most significant one-day percentage decline in nearly a year, falling by 4.62 percent.
The only sectors with gains were information technology, up 0.1 percent, and energy, up 0.09 percent.
Fastenal surged 7.5 percent as the industrial supplies company exceeded Q3 profit expectations. In contrast, Ford Motor saw a two percent decline as the United Auto Workers union extended its strike to the automaker’s biggest and most profitable facility.
“The biggest overhang to the market the last two months has been the rise in interest rates. Any meaningful move one way or the other on any given day is going to have an impact on equities,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles, as quoted by Reuters.
Fed’s policy prediction
Seema Shah, chief global strategist at Principal Asset Management, said Thursday’s inflation report would not influence the Federal Reserve’s decision on November 1 regarding interest rates. She described the data as “reassuringly uneventful.”
However, Boston Fed President Susan Collins, a non-voting member of the Federal Open Market Committee (FOMC) this year, suggested the central bank might continue raising interest rates to address inflation.
Futures linked to the Fed rate now suggest a 40 percent chance of a December hike, up from 28 percent. This change comes after a report revealed a 3.7 percent year-on-year increase in the consumer price index, beating the expected 3.6 percent rise.
Another quarter-point rate hike would take the Fed policy rate to 5.50-5.75 percent. Traders now expect next year’s rates to be around 4.6 percent, up from the previous expectation of 4.5 percent.