Wall Street drops on fears of tougher Fed policy

The Dow Jones industrial index closed down 0.30% to 32,899.37 points and the Standard & Poor’s 500 lost 0.57% to 4,123.34 points.

The technological Nasdaq Composite retreated 1.40% to settle at 12,144.66 points.

This Friday, the US employment figures were released. During the month of April, another 428 thousand jobs were created, while the unemployment rate remained at 3.6%. The active population rate – employed or looking for work – dropped to 62.2%. In turn, hourly wages rose by 5.5% year-on-year, but were below analysts’ estimates.

These numbers are worrying for the market, given that they may signal an even tighter monetary policy on the part of the US Federal Reserve, not only to contain inflation but also to guarantee full employment.

“The labor force rate has fallen, which is the opposite of what the Fed wants. In addition, wage inflation remains high,” said Steve Chiavarone, head of the multi-assets department at Federated Hermes, quoted by Bloomberg.

“The Fed will certainly accelerate the pace of tightening [monetário] if the labor force rate continues to fall, in a scenario of contraction [económica]”, said Peter Essele, responsible for the asset management department of the Commonwealth Financial Network, in statements to the US agency.

And speaking of the Fed, yesterday’s “hangover” in the markets, after Wednesday’s euphoria, continued today as well – being a pressure factor to which the labor market data added.

The Fed Effect

On Wednesday, Fed Chair Jerome Powell said that a 50 basis point increase in key interest rates is on the table at the Federal Reserve’s next two monetary policy meetings (in June and July), but stressed that the possibility of an increase in the order of 75 basis points is being considered. This encouraged the market, but it was a short-lived sun, as on Thursday Wall Street returned to the red, where it did not leave today.

“The day after Fed meetings is often far more accurate in terms of how Wall Street feels in the days and weeks that follow, rather than the initial two-hour reaction between the decision exit and the end of trading on Wednesday. And even though we don’t know what the record of the next few days will be, the truth is that, once again, the sentiment on Thursday was the opposite of that recorded in the final stretch of the previous day’s session, where the North American indices started a spectacular recovery, which substantially alleviated the weight of the red that has been normal in recent weeks”, commented Marco Silva, consultant at ActivTrades, in his daily analysis.

“The reason for the deflation of the oxygen balloon provided by Jerome Powell’s words was simple, but devastating: the interest on US sovereign bonds, which had fallen on Wednesday, with the 10-year interest rate falling from 3,001 % to 2.909%, they have already risen”, he adds.

In his view, “this turnaround demonstrates two relevant topics. The first is the extreme level of volatility and the impact that interest rates are having at this stage. the fact that there was no increase of 75 basis points in the reference rate, and this movement is not in the accounts of the members of the Fed, does not invalidate that the interest rates are not, already in the summer, at 1.75%. that the central bank was not more aggressive in a meeting just ‘buys’ a few weeks of not so high interest rates, although it is almost certain that, by the end of the year, the level will be at least 2.5%”.

“In short, the difference in rhetoric and interest rate hikes, between the most hawkish and the really decided, is small, and investors will quickly incorporate this into their analyses, reducing the tolerance for higher valuation ratios. been the ones that fell the most”, he concludes.

Source: Jornal de Negócios by www.jornaldenegocios.pt.

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