Hawkish Statements Once Again Derail Stocks

ByEdward Thompson

Nov 21, 2022

Hawkish Statements Continue To Haunt Investors

The index for futures in the US indicates an impressive opening in Wall Street. On the other hand, after succumbing to back-to-back losses in two consecutive days, European shares have been seen rebounding.

Both instances suggest that Federal Reserve will not stop implementing the policy of increasing the interest rates further for the time being.

As a result thereof, US S&P 500 index saw a 0.9% increase in its contracts. This indicates that the index will move into the recovery phase after accumulating a 1% loss during this week.

At the same time, there was an increase of 1% in the futures pertaining to the Nasdaq 100.

Applied Materials’ stock surged by about 4.4% when the chip manufacturing company presented its forecast which suggested a tremendous increase in sales.

Similarly, value gains were also witnessed by several other chip manufacturing companies such as Amazon, Meta, and Nvidia.

5 to 5.2% Rate Increase Suggestion

A few days ago, James Bullard, President of the St. Louis Fed suggested that in order to restrict inflation, the interest rate should not be reduced. In fact, he opined that the rates should increase at least by 5 to 5.25%.

Resultantly, shares in the US markets declined sharply.

USD Treads Carefully

In any case, USD was able to sneak into an upward trend while yields in the Treasury also went high.

However, there were many investors who were of the view that Bullard’s hawkish comments were just comments. They suggested that this does not mean that the rates would be increased at a level beyond expectation.

Fed Playing Mind Games

Abrdn Investment’s Director, James Athey commented that the Fed is doing its job perfectly well which demands it to keep the pressure on.

He remarked that hawkish statements do not insist that the rates would be much higher than what the investors were expecting ten days ago. According to Athey, Fed seems to be playing with the minds of the investors.

Whether or not there is any credence in the statements, however, the pressure is mounting further. It is feared that any further increase will adversely affect economic growth which will in return hurt Treasury yields.

Recession Could Be Triggered

Looking at history, when rates increase and yields are curbed, then deep recession overtakes the economy.

On the other hand, oil and copper prices witnessed a huge decline throughout the week because of the low demand factor.

Possible Headwind Ahead

A team of analysts working with the Bank of America, suggested a possible headwind in stocks if the Fed’s policy of increasing rates remains unchanged. They also expected the coming in of a bear rally in the stock markets.

As regards the index pertaining to Europe Stoxx, the index surged by about 1% which happened mainly because of energy.

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