By Isabel Wang and Joseph Adinolfi
10-year Treasury yields climbed, gold sank on Bullard's hawkish remarks
U.S. stocks ended lower on Thursday to log their first back-to-back losses in two weeks after two senior Federal Reserve officials said the central bank's benchmark interest rate may need to rise higher than earlier anticipated to subdue inflation.
How stocks traded
Stocks finished lower on Wednesday for the second time in three sessions, with the S&P 500 failing to break above 4,000. The Dow fell to 33,554, the S&P 500 declined to 3,959, and the Nasdaq Composite dropped to 11,184.
What drove markets
The Federal Reserve's benchmark interest rate will need to be increased further to a level high enough to bring inflation down, said St. Louis Fed President James Bullard, on Thursday.
"The change in the monetary policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023," said Bullard, in a speech in Louisville, Ky.
While Bullard didn't explicitly say how high he thought the policy rate needed to go, a chart in his presentation suggested it could be somewhere around a 5%-7% range.
See:This is the chart that is rattling U.S. financial markets Thursday
It's possible Bullard may have gone "overboard" by suggesting in a slide-show presentation that the Fed funds rate target may need to rise as high as 7%, Peter Boockvar, chief investment officer of Bleakley Financial Group, said in a note to clients Thursday. However, investors may be overreacting to his comments since Bullard won't have a vote on the Fed's policy-setting committee next year, he said.
The Minneapolis Fed's Neel Kashkari also said that he wants to be sure inflation has stopped climbing before he would support stopping interest rate hikes. "It's an open question of how far we are going to have to go with interest rates to bring that demand down in the balance," he told the Minnesota Chamber of Commerce in an event webcast on Thursday.
Fed funds futures traders are presently anticipating that the key benchmark rate will peak somewhere between 4.75% and 5.5% next spring, according to the CME FedWatch Tool
Chris Senyek, chief investment officer at Wolfe Research, said that Bullard's speech this morning bolster's their view that the Fed may hike as high as 6%.
"We believe that our intermediate-term bearish base case remains fully intact!" a team of strategists led by Senyek said in a note on Thursday.
See:A 6% fed-funds rate? Some investors say the risk is there, bringing the prospect of more painful Treasury selloffs
Treasury yields edged higher on Thursday, with the yield on the 10-year note climbing 8.1 basis points to 3.774%. The yield on the 2-year Treasury gained to 4.452% from 4.363% on Wednesday.
If there's anything to be gleaned from the public commentary unleashed by Bullard and other Fed officials this week, it's that "a rate-hike pause may not be coming soon, and cuts definitely aren't coming soon unless something breaks," said Callie Cox, U.S. investment analyst at eToro.
Investment banks have been adjusting their expectations for where interest rates may peak next year, with Goldman Sachs Group (GS) calling for the Fed funds rate to peak at 5.25%. Also, Wednesday's stronger-than-expected October retail sales number helped stoke fears that the Fed may need to be even more aggressive, diminishing hopes for a dovish pivot, as Deutsche Bank' Jim Reid said.
It also could be a reason why momentum that had carried the S&P 500 index to its highest level since mid-September has dissipated this week as the large-cap index has failed to close above 4,000.
In U.S. economic data released Thursday, housing starts showed that new-home construction has slowed, jobless claims fell slightly, while the Philadelphia Federal Reserve said its gauge of regional business activity sank to negative 19.4 in November from negative 8.7 in the prior month.
Aside from Bullard and Kashkari, Fed Gov. Philip Jefferson also said that achieving low inflation was a key for inclusive economic growth.
Companies in focus
-- Jamie Chisholm contributed reporting
(END) Dow Jones Newswires
November 17, 2022 16:47 ET (21:47 GMT)
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