Dow sheds nearly 400 points as strong data adds to concerns that Fed will need to be more aggressive

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U.S. stocks tumbled to their lowest levels of the day around midday Monday after a hotter-than-expected reading on the U.S. services sector added to concerns that the Federal Reserve might need to be even more aggressive in its battle against inflation, despite concerns about a looming recession.

How stocks are trading
  • The Dow Jones Industrial Average DJIA declined 404 points, or 1.2%, to 34,026.

  • The S&P 500
    SPX,
    -1.33%

    fell 61 points, or 1.5%, to 4,011.

  • The Nasdaq Composite
    COMP,
    -5.66%

    retreated 178 points, or 1.6%, to 11,284.

Stocks finished mixed on Friday, although they clinched a gain for the week, as the major indexes reversed most of their initial losses following Friday’s robust November jobs report — stoking fears that inflation might not be so easily defeated.

What’s driving markets

Strong wage growth numbers released Friday were followed up Monday by a robust reading for the U.S. services sector, both helping to stoke fears that the Federal Reserve’s interest-rate hikes, along with its modest balance-sheet unwind, haven’t had much of an impact on the tight U.S. labor market.

And on Monday, the ISM barometer of U.S. business conditions in the service sector came in stronger than expected, rising to 56.5% in November, a strong showing that signals the U.S. economy is still expanding at a steady pace.

Edward Moya, senior market analyst at OANDA, blamed the ISM data for sending stocks lower in mid-morning trade in New York.

“The ISM services index unexpectedly improved in November, with a slight decrease in prices paid. ​ This report could suggest wage pressures will remain strong,” he said.

November jobs data released on Friday showed average hourly wages grew by more than 5% in November, beating economists’ expectations and stoking concerns that robust wage growth would continue to fuel inflation, which accelerated to its fastest pace in more than four decades earlier this year, market strategists said.

Craig Erlam, another analyst at OANDA, explained in an earlier note why Friday’s data were so troubling for markets, even as the data signaled that the U.S. economy remains relatively strong despite the Fed’s interest-rate hikes.

“The inflation report on Friday was red hot once more, extinguishing any hope that investors could hop aboard the Fed pivot train and ride stock markets higher into year-end. Perhaps it’s not quite so dramatic but it was a real setback, something we should be used to by now,” Erlam said.

In other economic data news, the final November S&P Global U.S. services PMI, edged up to 46.2 from 46.1 but remained in contractionary territory.

Economists at most large Wall Street banks expect the U.S. economy will slide into recession at some point next year. A batch of forecasts released by the Federal Reserve in September shows that senior Fed officials expect growth to bounce back next year, although the central bank is due to release new forecasts after its next two-day policy meeting, which is set to conclude on Dec. 14.

Worries about a more-aggressive Fed also helped to drive Treasury yields higher, Erlam said, adding to the pressure on stocks. The yield on the 10-year note rose 6.9 basis points to 3.580% in recent trade. Treasury yields move inversely to prices, and yields have fallen sharply over the past month, driven by shifting expectations about the pace of Fed rate hikes.

In other markets news, signs that China’s government is easing its COVID restrictions helped support U.S.-traded shares of Chinese companies during the premarket, and also helped drive Hong Kong’s Hang Seng index
HSI,
+4.51%

to a 4.5% advance.

News of China’s less draconian COVID rules also helped to lift industrial commodities such as copper
HG00,
-1.18%
.
Meanwhile, prices of crude oil turned lower Monday after rising earlier in the session after OPEC and its allies opted not to change their production cap on Sunday after cutting it in October.

See also: Chinese ADRs and casino operators rally on signs of easing COVID

Falling equity prices helped drive the CBOE Volatility Index
VIX,
+8.18%
,
also known as the VIX, back above 20 on Monday. The volatility gauge has fallen sharply in recent weeks as stocks have rallied, potentially signaling complacency that could ultimately hurt stocks, said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.

“The SPX once again finds itself at downtrend resistance around 4,100 with VIX below 20. 10yr yields are back to key support at 3.50%. We expect both of these levels to hold, but wonder if yields break under 3.50% if it would be viewed as equity friendly as the move from 4.25% to 3.50% was?” Krinsky said.

Companies in focus

–Jamie Chisholm contributed reporting to this article



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