US Shares Retreat After Key Economic Data

The stock market fell Wednesday following still-strong economic data and the start of the Federal Reserve’s QE. The Dow Jones Industrial Average fell 177 points, or 0.5%, while the S&P 500 dropped 0.8%, and the Nasdaq Composite declined 0.7%. Stocks tried to rally in the afternoon but ultimately stumbled into the close.

Now, markets are pouring over several pieces of economic data, which may have implications for inflation and the Fed’s plans for raising interest rates.

US stocks shifted to the negative territory as expectations grew that the Fed will not be easing up on its rate-hiking endeavours in the aftermath of robust US economic data. The stocks’ retreat comes even after all three major indexes ended Tuesday in the red, amid concerns that the European Union’s new plans for restrictions on Russian oil would cause oil prices to head meaningfully higher. On Wednesday, WTI crude oil had risen $115 a barrel a few minutes before the closing bell, and it is up more than 12% in the past month.

The hot manufacturing number could easily portend inflation remaining fairly high, and that, in turn, could mean the Fed sticks to its plan of lifting interest rates far faster than it typically has in recent years.

The latest data was released by the Institute for Supply Management, namely the ISM manufacturing index. It came in at 56.1 for May, up from 55.4 in April, with any reading above 50 representing growth in activity. New orders grew, suggesting manufacturers are expecting strong demand even with rising interest rates

As far as employment is concerned, job openings remained near record levels in April, with 11.4 million positions open, the Labour Department reported on Wednesday. Recently, there have been about 1.9 openings for every unemployed person, according to 22V Research. That’s the type of dynamic markets want to see go away. Businesses, eager to hire, are having to pay higher wages, which then forces them to lift prices, contributing to overall inflation.

The Treasury bond market didn’t take too kindly to both pieces of data. The 2-year Treasury yield, which attempts to forecast the level of the federal-funds rate two years from the present, had risen to 2.65% minutes before the bell, a level it hasn’t risen to in a couple of weeks.

There is more data to come. Jobless claims are due Thursday, and then the May jobs report will be released on Friday. Economists are looking for 328,000 jobs to have been added, which would be below the 428,000 jobs added in April. Markets want to see a strong jobs number, which indicates a strong economy, but not too strong, which would be a sign that the Fed still needs to do more to slow the economy to combat inflation. A number too far ahead of expectations could also point to still-high inflation, as more people would be earning incomes and spending.

May is over, but inflation worries, the war, and high energy prices welcome the new month with the markets. Consistent with high inflation, the Fed begins reducing its balance sheet today. In a process called quantitative tightening, the Fed will not reinvest set amounts of interest income back into the bond market. Less money moving into bonds lowers their prices and lifts their yields, making them more attractive to investors. Already, the 10-year Treasury yield rose to 2.93%, from 1.51% at the end of 2021, which has contributed to some of the decline in stocks this year.