Markets Erase Weekly Gains in Late-Day Rout…..

Early gains for U.S equities evaporated midday, accelerating downward in afternoon action to finish solidly lower, following reports of increased tensions between Russia and Ukraine. The moves also came on the heels of yesterday’s unexpected acceleration in the January consumer price inflation report, exacerbated by comments from St. Louis Fed President James Bullard saying the report amplified his hawkishness, as he suggested the Central Bank should raise rates by 100 basis points by July and said the Fed should consider intra-meeting action. Treasuries reversed to the upside to finish higher, pulling back some of yesterday’s spike in rates, and the U.S. dollar traded to the upside, while crude oil prices were solidly higher, posting an eighth straight week of gains, and gold jumped. News on the economic front was light, showing a preliminary read on February consumer sentiment that fell to a more than decade low as expectations continued to tumble. Earnings season remained in focus, with Under Armour topping expectations, but warning of continued supply and freight cost headwinds, and Expedia Group topping earnings forecasts and offering some upbeat forward-looking commentary. Elsewhere, Zillow Group trimmed a recent plunge after the company posted better-than-feared results and offered positive commentary about its transition. Stocks in Europe and Asia traded to the downside as the markets remained focused on monetary policies and the developments on the U.S. front.

The Dow Jones Industrial Average lost 504 points (1.4%) to 34,738, the S&P 500 Index decreased 85 points (1.9%) to 4,419, and the Nasdaq Composite tumbled 394 points (2.8%) to 13,791. In very heavy volume, 5.2 billion shares of NYSE-listed stocks were traded, and 5.1 billion shares changed hands on the Nasdaq. WTI crude oil jumped $3.22 to $93.10 per barrel. Elsewhere, the gold spot price traded $26.60 higher to $1,864.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% to the upside at 96.02. Markets were lower for the week, as the DJIA was down 1.0%, the S&P 500 lost 1.8%, and the Nasdaq Composite fell 2.2%.

The markets have seen some wild swings as the markets grapple with the Fed tightening uncertainty and still solid absolute earnings growth during the quarter but some relative deterioration compared to the previous four quarters.

U.S. stocks came into the week seemingly still riding high on last Friday’s much stronger-than-expected January nonfarm payroll report and an earnings season that was still on track to post the fourth-straight quarter of above 25.0%. However, a data point loomed on the week’s horizon that would begin to develop the January inflation picture that most on the Street appeared to expect to see some signs of moderation. The report delivered on the promise of being a market-moving event as the markets sold off sharply on Thursday as consumer price inflation unexpectedly accelerated and moved further to highs not seen since 1982. This agitated already elevated market skittishness that the Fed was well behind and curve and would have to be more aggressive in tightening monetary policy through rate hikes and balance sheet reduction. This uneasiness was taken to another level when St. Louis Fed President Bullard said “I was already more hawkish but I have pulled up dramatically what I think the committee should do.” Bullard said he would like to see 100 bps in the bag by July 1, and even floated the idea that the Central Bank should take action before its next scheduled gathering in March. Treasury bond prices tumbled and yields spiked, with the rate on the 10-year yield breaching 2.00% for the first time since the summer of 2019. But the real action came on the short-end of the curve, with the yield on the 2-year note jumping 26 bps to post its largest intraday swing since the global financial crisis and severely narrowing the spread compared to the 10-year.

The markets continued to digest the recent rise in Treasury yields that hit a fevered pitch yesterday in the wake of an unexpected acceleration in January consumer price inflation, which hit the highest y/y pace in 40 years. Worries about a more aggressive Fed tightening campaign ensued and was exacerbated by comments from St. Louis Fed President James Bullard who said late-yesterday that he supports raising interest rates by a full percentage point by the start of July and that the Central Bank should consider hiking rates by 25 bps “right now” before the scheduled March meeting. Bond prices tumbled on his comments to increase the upside pressure on yields, notably a 26 bp jump in the rate on the 2-year note, and the shocking one-day move also exacerbated the pressure on the equity markets.

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