Stocks slump, Treasury yields rise on fear of a faster Fed pullback

5:33 pm Wednesday, January 05th, 2022

By Lawrence Delevingne

BOSTON (Reuters) -U.S. stocks slid and Treasury yields jumped on Wednesday after meeting minutes released by the Federal Reserve indicated that it might not only raise interest rates sooner than expected but could also reduce its overall asset holdings to tame high inflation.

The Dow Jones Industrial Average fell 392.54 points, or 1.07%, to 36,407.11; the S&P 500 lost 92.96 points, or 1.94%, to 4,700.58; and the Nasdaq Composite dropped 522.54 points, or 3.34%, to 15,100.17 — led downward by shares of technology titans Apple Inc, Google parent Alphabet Inc, Amazon.com, Meta Platforms and Microsoft Corp.

The Fed minutes from December, released on Wednesday, offered more details on the Fed’s shift last month toward a more hawkish monetary policy. Policymakers agreed to hasten the end of their pandemic-era program of bond purchases, and issued forecasts anticipating three quarter-percentage-point rate increases during 2022.

“Today’s FOMC minutes make clear that discussions about more than three rate hikes and outright quantitative tightening this year are on the table,” Dave Donabedian, chief investment officer for CIBC Private Wealth, U.S., said in an email.

U.S. Treasury yields soared on Wednesday after the Fed meeting minutes came in more hawkish than expected.

U.S. 2-year and 5-year yields, which mirror rate hike expectations, climbed to their highest since March and February 2020, respectively. The benchmark U.S. 10-year yield rose to its strongest level since April 2021, at around 1.7%, while 30-year yields climbed to more than two-month peaks.

One positive economic indicator on Wednesday was the ADP National Employment report, which showed private payrolls increased by 807,000 jobs last month, more than double what economists polled by Reuters had forecast.

Citing an optimistic corporate earnings forecast, market analysts at Citi raised their 2022 S&P 500 index price target to 5,100, a 7% gain from year-end 2021.

“We remain moderately constructive on the broader market outlook, while acknowledging valuation headwinds as the Fed moves down a more hawkish path,” the Citi analysts wrote before the Fed minutes were released.

Citi’s target was toward the higher end of other banks, with Morgan Stanley at 4,400 and Goldman Sachs also at 5,100.

Oil prices rose modestly on Wednesday, extending gains even after OPEC+ producers stuck to an agreed output target rise for February and U.S. fuel inventories surged due to sliding demand as COVID-19 cases spiked.

U.S. crude rose 0.09% to $77.06 per barrel and Brent was at $80.08, up 0.1% on the day.

The dollar fell on Wednesday but pared losses to a 0.091% dip after the Fed minutes were released.

In cryptocurrencies, bitcoin fell about 3.5% to $44,201 — still significantly below its most recent all-time high of $69,000 reached in November.

Goldman Sachs said in a research note on Tuesday that bitcoin would likely take market share away from gold as a “store of value” as digital assets become more widely adopted and that its price could hit $100,000 in five years.

Spot gold dropped 0.3% to $1,809.58 an ounce. U.S. gold futures gained 0.06% to $1,824.60 an ounce.

(Reporting by Lawrence Delevingne, Elizabeth Howcroft and Medha Singh; editing by Jonathan Oatis, Marguerita Choy and Aurora Ellis)