Wall Street’s main stock indexes were set to open sharply lower on Thursday, as the Federal Reserve’s guidance to stick to protracted policy tightening quelled hopes of the rate-hike cycle ending anytime soon.
The U.S. central bank hiked rates by 50 basis points (bps) on Wednesday, slowing down from four back-to-back 75 bps hikes, although Fed Chair Jerome Powell said recent signs of slowing inflation have not brought any confidence yet that the fight had been won.
The Fed’s policy-setting committee projected it would continue raising rates to above 5% in 2023, a level not seen since a steep economic downturn in 2007.
“The issue was the market was looking for rate cuts in 2023 and that’s not compatible with any credible economic scenario because you’d need to have quite a collapse in economic activity and a speedy deterioration of the labor market,” said Willem Sels, global CIO, private banking and wealth management at HSBC.
Money market participants currently expect at least two 25 bps rate hikes next year and borrowing costs to peak at 4.9% by May next year, before falling to around 4.4% by year-end.
Wall Street’s main indexes have staged a strong recovery since hitting 2022 lows in October on hopes of a less aggressive Fed, but the rally stalled in December due to mixed economic data and worrying corporate forecasts.
Investors also digested economic data on Thursday that showed a steeper-than-expected decline in retail sales in November and the number of Americans filing for unemployment benefits declining last week, indicating a tight labor market.
“In some ways today’s data reinforces what Powell was saying yesterday that this is going to take time and the market seems to want to try and fast forward through the messy parts and it’s just not going to be able to do that because the Fed is not going to let it,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
The Bank of England and the European Central Bank also raised their key interest rate by 50 bps each and indicated more likely hikes in a bid to tame spiraling inflation.
At 8:57 a.m. ET, Dow e-minis were down 358 points, or 1.05%, S&P 500 e-minis were down 54.25 points, or 1.35%, and Nasdaq 100 e-minis were down 194 points, or 1.63%.
Shares of megacap companies, including Apple (AAPL.O), Amazon.com Inc (AMZN.O) and Microsoft Corp (MSFT.O) fell more than 1% each in premarket trading.
Tesla Inc (TSLA.O) fell 2.9% after CEO Elon Musk disclosed another $3.6 billion in stock sales, taking his total near $40 billion this year and frustrating investors as the company’s shares wallow at two-year lows.
Netflix Inc (NFLX.O) slumped 4.8% after a media report said the entertainment services firm will let its advertisers take their money back after missing viewership targets.
Nvidia Corp slipped 2.6% after HSBC Global Research began coverage on the chipmakers stock with a “reduce” rating, while Western Digital (WDC.O) slid 5.2% following a report that Goldman Sachs downgraded the data storage firm’s stock to “sell” from “neutral”.
