The 10-year Treasury yield hit its high of the day and the S&P 500 hit its low of the session following the Federal Reserve’s release of the minutes of its December meeting. The meeting minutes showed the Fed discussing reducing its balance sheet shortly after it raises rates later this year.
The tech-heavy Nasdaq fell 1.7%, while the S&P 500 slid 0.6%.The blue-chip Dow Jones Industrial Average fell slightly, losing 55 points, or 0.01%.
The Fed is tapering its bond purchases now and has already indicated to the market that it will raise rates soon after it finishes that taper in March. But the market is awaiting indications from the Fed on what it would do with its balance sheet once it’s done increasing it. The minutes show officials considering to shrink the balance sheet along with raising rates as another way to remove policy accommodation.
Salesforce dropped 5.6% Wednesday following a downgrade from UBS. UBS also cut Adobe, sending its shares down 4.8%. Both were among the top decliners in the S&P 500. Adobe dragged down the Nasdaq too, along with cloud company Okta, which fell 3.7%. Chipmakers Nvidia and Advanced Micro Devices as well as Google parent Alphabet were each down about 2%.
Stocks linked to the reopening helped push the Dow higher Wednesday. Honeywell and Freeport-McMoRan both rose about 2%. Boeing, Caterpillar and General Electric added about 1% each. Bank of America gave an upgrade to Pfizer, noting that the company’s profits from Covid treatments provide upside for the stock. Pfizer’s shares moved 2.3% higher.
These moves came as Treasury yields have surged to start the year. On Tuesday, the benchmark 10-year yield reached 1.71%, its highest level since November.
“You’ve seen a move of people rotating from tech, high-growth and momentum stocks to value, cyclical and income stocks,” Infrastructure Capital Management CEO Jay Hatfield said. “It’s the liquidity that’s driving this, not the interest rate, necessarily. When there’s liquidity you go for momentum because the Fed is forcing stocks and bonds to rally. If the Fed is going to pull that liquidity out, you say I want to be in what’s the cheapest, the lowest risk.”
The Federal Reserve said last month it will unwind its monthly bond-buying program at a faster pace, as the central bank tries to grapple with a surge in U.S. inflation.
“U.S. stocks are struggling for direction,” Oanda senior market analyst Edward Moya said. “The first half of the year will be all about a strong U.S. growth outlook that should benefit cyclical stocks, but a sustained pullback with tech stocks is not justified given the Fed hasn’t officially started their interest rate hiking cycle.”
Strong payrolls data
ADP reported Wednesday that private job growth totaled 807,000 in December, more than double the Dow Jones estimate of 375,000. The data in the report covers only through the middle of December, however, which was before the height of the escalation in Covid cases and concerns.
Investors looking for clues on where the economy stands heading into the new year also awaited Friday’s more closely watched nonfarm payrolls count, which is expected to show a gain of 422,000.
They’re also awaiting the release Wednesday of minutes from the December Federal Reserve meeting. Policymakers decided then to accelerate the pace of the monthly bond buying taper and indicated that three quarter-percentage-point interest rate hikes are coming in 2022. They also adjusted their outlook on inflation and economic growth.
However, the market will be seeking additional information on where officials see policy heading, particularly on what will happen with the Fed’s nearly $9 trillion balance sheet.
“This is the key risk for the year. If the Fed starts shrinking starts shrinking the balance sheet that’s going to be disastrous,” Hatfield said. “I assume that they’re going to keep the balance sheet flat, but it is possible if inflation stays really hot that they start letting the balance sheet run off.”
If that happens, “it’s not just that they’re not injecting liquidity, they’re taking liquidity out,” Hatfield added. “You don’t want to be in the stock market when the Fed is taking liquidity out of it. It’s like being in Coke when Warren Buffett is selling his position.”
