US stocks are in the worst week in nearly four months

Wall Street stocks were heading into the worst week in nearly four months following comments from Federal Reserve policymakers that indicated the U.S. central bank was keenly aware of potential inflationary pressures.

The benchmark S&P 500 fell 1% on Friday, bringing the week’s losses to 1.6%. About 90 percent of shares of the blue chip index were lower on the day, including shares of large banks and U.S. oil companies.

Investors withdrew from some of their most popular operations of the year, including an earlier move toward shares of smaller firms considered particularly sensitive to economic growth. The Russell 2000 small capitalization index was at the rate of heavier weekly losses since the end of January, falling 3.7 percent.

The movements continued comments of Fed Chairman Jay Powell on Wednesday that investors took as a signal that the U.S. central bank would act to tame inflation and that policymakers were not exclusively focused on helping the country’s labor market.

On Wednesday, Fed policymakers projected that interest rates would rise from record lows in 2023, from their previous forecast for 2024. This view gained more momentum after an interview with James Bullard, president of the St. Louis Fed, held Friday on CNBC, where it said the first rate hike could come next year.

The change in Fed policymakers has shaken the so-called trade of reflectionand instead helped drive technology stocks that had lost momentum this year. Although the Nasdaq Composite, which has been very technological, was 0.7% lower on Friday, it is expected to end the week less than 0.1%.

Inflation expectations have been drastically marked this week as investors digest the Fed’s latest decision. George Saravelos, strategist at Deutsche Bank, noted that inflation and growth growth expectations were “consistent with the continued resilience of equity, especially in growth stocks,” where lower bond yields they make the value of future earnings more attractive.

He added that the fact that changes in financial markets were “led by a huge relative rotation of the Russell on the Nasdaq should come as no surprise.” Saravelos compared it to the market between 2010 and 2019, when valuations of growth stocks rose due to moderate or low growth and low inflation.

The fall in equities accompanied a long-term rise in U.S. government bonds on Friday, as investors saw earlier projections of what was expected of the rise in U.S. interest rates as a sign of willingness of the central bank to control inflation.

The yield on the 10-year benchmark US Treasury bond, which moves inversely to its price, was 0.06 percentage points lower, at 1.44%.

This yield rose 0.9% at the beginning of the year, but has moderated in recent months as investors have seen jumps to US inflation as temporary. Persistent inflation erodes the yields on fixed interest bonds.

“The narrative of the bond market has changed on a whim,” said Tatjana Greil-Castro, co-director of public markets for credit investor Muzinich. “It simply came to our notice then [coming out of the Covid-19 crisis] that inflation will be permanently high. Then the story was that this was the top and [inflation] it would go down and I think history keeps changing because we don’t know it yet ”.

The dollar also followed the pace of its best week since last September, as short-term Treasury yields rose, setting prices for future rate hikes. The dollar index, which measures the greenback against the major currencies, rose 0.4% on Friday and reached its weekly gain of 1.8%.

Gold, which is priced in dollars and often moves inversely to the U.S. currency, traded at $ 1,773 an ounce on Friday, down nearly 6% since Monday, in its biggest weekly drop. since March 2020.

“Because of the surprising surprise of the rate hike expectations that have been advanced, you have seen a rather aggressive move in the dollar,” said Keith Balmer, BMO Global Asset Management’s multi-asset portfolio manager. “Most of the market was bassist about the dollar before that meeting, ”he said, as traders had already predicted that the Fed would keep monetary policy extremely weak.