Wall Street posts its first week down in the last four on interest rate concerns

Wall Street ended its first losing week in the last four with ebbs and flows on Friday as investors waited for the Federal Reserve to tighten the brakes on the economy more aggressively in a bid to dampen inflation.

Big tech stocks led the market lower again, with the S&P 500 falling 11.93 points, or 0.3%, to 4,488.28 after fluctuating for most of the day. The Dow Jones industrial average rose 137.55, or 0.4%, to 34,721.12. Meanwhile, weakness in technology stocks dragged the Nasdaq Composite down 186.30 or 1.3% to 13,711.00.

This week, the S&P 500 is down 1.3%. Stocks have tumbled as the US Federal Reserve becomes more aggressive in tackling inflation by raising short-term interest rates and other moves. It’s a sharp reversal from keeping interest rates at record lows to boost the economy and carry it through the pandemic.

Investors learned this week that the Fed may hike short-term rates by twice the usual amount at several upcoming meetings and has come close to doing so over the past month. The last time this happened was in 2000. The Fed also indicated in the minutes of its last meeting that it expects to reduce its huge bond portfolio by up to $95 billion a month, starting as early as next month.

Overall, the measures are likely to make borrowing more expensive for US households and businesses, which in turn would slow the economy and hopefully stop the hottest inflation in 40 years.

Higher interest rates hurt all types of investments, especially stocks, which are seen as the most expensive. That’s because higher interest rates mean better returns on owning relatively safe bonds, making investors less willing to pay higher prices for riskier assets like stocks.

That’s why big tech and other high-growth stocks have led the market lower of late. Amazon, Nvidia and Tesla were among the heaviest weights in the S&P 500 on Friday, each down at least 2%.

There are also concerns about the strength of the economy. With the Federal Reserve set to raise interest rates so aggressively, there are fears it will hit the brakes too hard or too quickly, pushing the economy into recession. Though that’s not the consensus on Wall Street, economists at Deutsche Bank said this week they are forecasting a US recession by the end of next year.

The war in Ukraine has made things more uncertain, threatening to exacerbate inflation and hurt the global economy. Oil, gas and food prices have been particularly volatile since Russia invaded the country.

A barrel of US crude rose $2.23 to $98.26 on Friday. It has been swinging wildly for the past few weeks, briefly surpassing $130 in the last month. Brent crude, the international standard, added $2.20 to settle at $102.78 a barrel.

Much of the market has focused on the bond market, where expectations of a more aggressive Fed have pushed yields to their highest levels in three years. The 10-year yield rose to 2.71% from 2.65% late Thursday. At the beginning of the year it was still 1.51%.

It could rise further if the Fed not only halts but reverses its trillion-dollar bond-buying program.

Buying bonds helped prices of stocks and other financial assets soar and markets remained relatively calm, wrote chief investment strategist Michael Hartnett in a recent BofA Global Research report.

Now the Fed is less than a month away from reversing that, which will be “inherently negative” for financial assets, Hartnett said. He said this should lead to higher bond yields and greater volatility in markets.

Meanwhile, COVID-19 continues to depress economies around the world, especially in China. Shanghai residents face severe restrictions on movement and activities due to a surge in infections, with economic repercussions around the world.

ACM Research, a supplier of equipment for the semiconductor industry that operates in Shanghai, said the restrictions will significantly affect its sales. The stock fell 6.1%.

A surge in COVID-19 cases is also responsible for flight disruptions in Europe. Two major airlines, British Airways and easyJet, canceled about 100 flights on Wednesday. The industry is suffering from staff shortages due to the virus.

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