Wall Street’s main indexes closed lower on Wednesday after weak economic data and hawkish comments from Federal Reserve officials sparked worries that the central bank will keep tightening policy, perhaps enough to cause a recession. The S&P 500 fell 1.6%, the worst decline in a month, while the tech-heavy Nasdaq 100 snap a seven-day rally, after reversing gains of more than 1%. Earlier, stocks rallied as Treasury yields fell across the curve on bets weak data would prompt the Federal Reserve to downshift its tightening policy.
Before the market opened, U.S. economic data showed retail sales and producer prices declined more than expected in December. Also production at U.S. factories fell more than expected in December and output in the prior month was weaker than previously thought.
St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester stressed on the need to raise rates beyond 5% to bring inflation to heel.
Growth in US prices is expected to ease in the year ahead, contacts surveyed in the Federal Reserve’s latest Beige Book which is a based on anecdotal information collected by the Fed’s 12 regional banks through Jan. 9 and compiled by the Cleveland Fed.
“Selling prices increased at a modest or moderate pace in most districts, though many said that the pace of increases had slowed from that of recent reporting periods,” the Fed said Wednesday in the report, published two weeks before each meeting of the policy-setting Federal Open Market Committee. “On balance, contacts across districts said they expected future price growth to moderate further in the year ahead.”
The Fed commentary also highlighted the disparity between the U.S. central bank’s estimate of its terminal rate and market expectations, which were of the rate peaking at 4.88% by June. Traders are now betting on a 25-basis point rate hike in February with the Fedwatch rate probability for the next meeting in currently sitting at a 95.3% probability of a 25 basis point hike.
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