Monday, May 20, 2024

Wall Street weakens as higher rates keep tightening squeeze

by BIZ Magazine

NEW YORK (AP) — Stocks are falling on Wall Street Tuesday amid worries about upcoming profits for companies and the tightening squeeze of higher interest rates.

The S&P 500 was 0.8% lower in its first trading of the week following Monday’s holiday. The Dow Jones Industrial Average was down 282 points, or 0.8%, at 33,544, as of 9:45 a.m. Eastern time, while the Nasdaq composite was 0.9% lower.

Home Depot and Walmart both fell despite reporting stronger profit for the last three months of 2022 than expected. For both, the worry was about upcoming earnings after they gave forecasts that fell short of Wall Street’s expectations.

Home Depot, for example, dropped 4.5% after it said it would spend $1 billion to increase wages for hourly U.S. and Canadian workers. That fed into broader worries for markets that rising costs for companies have been eating into profits, which are one of the main levers that set stock prices.

The other main lever is also looking precarious as interest rates continue to rise. When safe bonds are paying higher amounts of interest, they make stocks and other investment look comparatively more expensive. Rates have climbed high enough that strategists at Morgan Stanley say U.S. stocks look to be more expensive than at any time since 2007.

The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, rose further to 3.90% from 3.82% late Friday. The two-year yield, which moves more on expectations for the Fed, rose to 4.69% from 4.62%.

Yields have shot higher this month as Wall Street ups its forecasts for how high the Federal Reserve will take short-term interest rates in its efforts to drive down high inflation. The Fed has already pulled its key overnight rate up to a range of 4.50% to 4.75%, up from basically zero a year ago.

Several reports have recently come in on the economy that were stronger than expected. On the positive side for markets, they helped allay fears that the economy may soon fall into a recession. But on the negative side, they also give the Fed more reason to stick to the “higher for longer” campaign it’s been espousing for interest rates to snuff out inflation.

Besides dragging on prices for investments, higher rates also slow the economy by making borrowing more expensive and raise the risk of a recession down the line. That’s caused the more pessimistic investors on Wall Street to keep their forecasts for a recession but move its timing later into the year.

The Fed said in December that its typical policy maker sees short-term rates rising to 5.1% by the end of this year with the earliest cut to rates happening in 2024. After earlier thinking the Fed would ultimately take it easier on rates than it was saying, Wall Street has largely come into closer alignment with the Fed’s view.

The worry is that the Fed could ratchet up its forecasts for rates further next month when it releases its latest projections for the economy. Besides showing the job market and retail sales have been stronger than expected, recent reports on the economy have also suggested inflation is not cooling as quickly and as smoothly as hoped.

In stock markets abroad, shares were mostly lower after manufacturing indicators in Europe and Asia painted a mixed picture and Russian President Vladimir Putin accused Western countries of threatening Russia.

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