Market Snapshot: U.S. stocks pare losses, Dow turns higher, after Fed rocks markets

What’s driving markets

The Fed on Wednesday delivered the expected 75 basis point hike in its benchmark interest rate target to a range of 3.75% to 4%. However, investors fixated on comments made during Powell’s press conference which suggested that the Fed is nowhere near pausing its campaign of raising interest rates.

“It is very premature to be thinking about pausing. When people hear lags, they think about pauses. It’s very premature, in my view, to talk about pausing our rate hikes. We have a way to go,” Powell said.

He also suggested that the Fed’s benchmark rate may need to top the level of core inflation to stamp out inflation, a hint that the Fed funds rate may need to be pushed above 5% and left there for a while to succeed in dragging inflation back down to its 2% target.

See: Opinion: How Powell pivoted away from the Fed’s dovish message and tanked the markets

Eric Diton, president and managing director of the Wealth Alliance, blamed the backlash in equity prices on the dashing of investors’ hopes that Powell might signal that the end of the Fed’s tightening cycle might be near.

“Powell has been crystal clear that this is not a short-term tightening event,” Diton said. “They plan to keep rates tighter for a while and until they see a response from inflation.”

See also: Live Markets Blog

And even if they opt for smaller rate rises in December and January, Powell is telegraphing to investors that the terminal rate might ultimately need to rise even higher than many investors had previously anticipated, said Gene Goldman, chief investment officer of Cetera Financial Group.

Expectations for a higher terminal rate were reflected in Fed funds futures, which track expectations surrounding where the Fed’s key benchmark rate might be in the future. According to the CME’s FedWatch tool, traders were pricing in a 31% chance that the benchmark could climb to between 5.25% and 5.5%, compared with a 16.6% chance on Wednesday. 

Another rise in the 2-year Treasury yield was also adding to pressure on stocks, Goldman added, since the 2-year rate is a proxy for expectations surrounding where the Fed funds rate might be a year or more into the future.

As equity investors brook losses, Goldman said he expects to hear from a bevy of senior Federal Reserve officials who he expects will try to clarify Powell’s remarks in an attempt to calm markets.

“Now that the quiet period is over for the Fed, you’ll see a lot of Fed speak coming out and talking down some of the market’s assumptions,” Goldman said.

The 2-year yield
TMUBMUSD02Y,
4.715%
rose to 4.724%, its highest level since 2007, as the difference between the 2-year and 10-year yields further inverted to more than -60 basis points at one point. Higher yields also helped push the dollar higher, with the ICE U.S. Dollar Index
DXY,
+1.45%
climbing 1.4% o 112.9.

Julian Emanuel, senior strategist at Evercore ISI, said in a note that Powell’s “hawkish message underpins volatility into and beyond the [Nov. 8 U.S. midterm election]. A retest of the October lows, particularly [by the] growth centric Nasdaq 100, becomes base case.”

Meanwhile, the tech-heavy Nasdaq was underperforming due to both the sharp rise in the 2-year yield, and the disappointing earnings from semiconductor stalwart Qualcomm QCOM. The company’s shares were down more than 8% in morning trade Thursday.

Investors are awaiting Friday’s October jobs report, but in the meantime a weekly reading on the number of Americans applying for jobless claims fell slightly to 217,000, clinging near pandemic lows.

See: New jobs created in October likely to dip to two-year low, but not enough to tame inflation

In U.S. economic data Thursday, the ISM services sector activity index for October dropped to 54.4% in October from 56.7, while September factory orders rose 0.3%, matching consensus. Looking ahead, investors will receive earnings reports from Starbucks
SBUX,
+0.64%,
PayPal
PYPL,
-2.84%,
and Warner Bros Discovery
WBD,
-6.15%
after the close.

Companies in focus

• Shares of Under Armour Inc.
  UAA,
  +13.24%
  jumped 11.7% after the athletic clothing maker topped analyst estimates for adjusted earnings and revenue. Looking ahead, the athletic clothing maker trimmed its fiscal 2023 revenue to increase at a low single-digit percentage rate, down from its earlier guidance of up 5% to 7%.

• Zillow Group Inc.
  Z,
  +12.61%
  shares advanced 11.9% after the online housing company reported earnings that beat consensus expectations, but the company foresees lower revenue in the fourth quarter amid a volatile housing market and rising mortgage rates.

• Moderna Inc. shares 
  MRNA,
  +0.04%
   were down 2.2pton% after falling sharply ahead of the bell Thursday as the COVID vaccine maker posted far weaker-than-expected third-quarter earnings and said short-term supply constraints would impact 2022 advance purchase agreements. 

• Peloton Interactive Inc. shares 
  PTON,
  +4.11%
  rose 2.6% after falling nearly 20% in premarket trade as the maker of connected fitness equipment saw its losses narrow but forecast significantly lower revenue for the holiday quarter than analysts had anticipated.

• Restaurant Brands International Inc.’s
  QSR,
  +2.11%
  stock rose 2.3%, boosted by the company’s better-than-expected third-quarter results.

— Jamie Chisholm contributed to this article.