Stocks Fall as Investors Brace for More Fed Tightening


U.S. stock indexes fell Tuesday for a third consecutive session as investors parsed fresh economic data and braced for tightening monetary policy.

The S&P 500 shed 1.1%. The tech-focused Nasdaq Composite lost 1.4% and the Dow Jones Industrial Average retreated 0.9%.

Stocks began selling off Friday after Federal Reserve Chairman

Jerome Powell

said the central bank must continue raising interest rates and hold them at a higher level until it is confident inflation is under control. This ran contrary to some investors’ prior expectations that the Fed would ease the pace of rate increases due to worsening economic data and easing inflation figures.

The comments led investors to bet on another aggressive rate increase at the September meeting. Futures bets show that traders see a roughly 75% probability that the Fed will raise interest rates by another 0.75 percentage point at its next meeting, according to

CME Group.

Investors tend to sell stocks and government bonds when financial conditions are tightening. 

“Ever since Chairman Powell’s speech, the market has refocused on the macro environment and monetary policy. With the Fed being aggressive again, that cloud of uncertainty is weighing on the markets,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

The consumer-sentiment index and the consumer-confidence index both try to measure the same thing: consumers’ feelings. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

A new labor market reading released Tuesday morning came in better than expected, appearing to confirm fears the Fed could feel comfortable continuing its aggressive rate-raising campaign. Job openings grew in July, the Labor Department reported. The U.S. recorded a seasonally adjusted 11.2 million job openings in July, up from the month before.

“Those strong job numbers do point to the likelihood of ongoing Fed aggressiveness and hawkishness,” Mr. Ma said.

In other economic data, American attitudes toward jobs and the economy brightened in August from the month before, the Conference Board’s consumer-confidence index showed.

Meanwhile, home-price growth slowed in June as higher mortgage rates made homeownership less affordable, according to the latest figures from the S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation.

Shorter-dated bond yields, while longer-dated yields were little changed, a sign that investors are reassessing how high interest rates will go. The yield on the two-year Treasury note, which is more sensitive to near-term Fed policy expectations, ticked up to 3.462% from 3.427% Monday. The benchmark 10-year Treasury yield was little changed at 3.108% compared with 3.109% Monday. Yields and prices move inversely. 

The selloff in stocks was broad, with all 11 sectors of the S&P 500 in negative territory. Nearly every component in the blue-chip Dow industrials traded lower.

Shares of Bed Bath & Beyond fell 6%, retreating from Monday’s 25% rally, ahead of a strategic update due before the market opens Wednesday. The stock has logged wild swings this year amid a frenzy of trading among individual investors. 

On the earnings front,

Best Buy

and

Big Lots

shares rose 2% and 7.8%, respectively, after the retailers reported quarterly results that beat consensus analyst expectations. Still, the companies warned of a pullback in spending as consumers contend with hot inflation.

With the second-quarter earnings reporting season drawing to a close, economic reports could hold greater significance for investors without corporate dispatches to mull over, according to Joe Zappia, principal and co-chief investment officer at LVW Advisors.

“More important than the actual economic releases over the next few weeks is how the markets react to them. That will give a clue about sentiment and positioning,” he said.

Traders worked on the floor of the New York Stock Exchange on Monday.



Photo:

Michael M. Santiago/Getty Images

In energy markets, Brent crude, the international benchmark for oil prices, fell 5.5% to $97.29 a barrel. Energy stocks also sold off sharply, with the sector leading losses in the S&P 500.

Overseas, the pan-continental Stoxx Europe 600 retreated 0.7%. Major indexes in Asia were mixed, with China’s Shanghai Composite and Hong Kong’s Hang Seng each declining less than 0.5%. South Korea’s Kospi added 1%, and Japan’s Nikkei 225 rose 1.1%.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

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