Stock market trades off Monday's ugly lows, but Dow, Nasdaq, S&P 500 all down sharply as yields climb

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By Mark DeCambre and Steve Goldstein

U.S. stock indexes were falling sharply midday Monday, with the information technology sector once again facing the brunt of the selloff, as the benchmark 10-year Treasury yield rose to 1.8%, with worries about Federal Reserve policy reverberating in financial markets.

What’s happening

On Friday, the Dow finished nearly unchanged, but the S&P 500 fell 0.4% and the tech-heavy Nasdaq Composite lost 1%. According to FactSet, growth stocks underperformed value stocks last week by the most since election week 2020.

What’s driving markets

The Nasdaq Composite, though off its worst levels, was facing an intense selloff on Monday, trading near its lowest level since mid-October and threatening to close below its 200-day moving average, at 14,688.73, for the first time since April 21, 2020, according to Dow Jones Market Data.

Analysts continue to discuss Friday’s payrolls report and minutes from the Federal Reserve’s December meeting released last Wednesday.

“The market has gotten off to a chilly start with stocks seemingly still digesting the FOMC minutes surprise — with the Fed revealing a more aggressive agenda,” wrote Chris Larkin, managing director trading at E-Trade Financial, in emailed comments.

Friday’s labor report came in at 199,000 jobs in December, worse than forecast, but it also showed a decline in the unemployment rate to a pandemic low and a rise in wages. The labor-market reading comes after Fed minutes signaled that policy makers are eager to tighten financial policy to battle inflation, with market-based projections pointing to at least three interest-rate increases this year.

Read: Jekyll-and-Hyde U.S. jobs report not as ugly as it looks

Deutsche Bank’s economists expect four hikes in 2022, starting in March, which is roughly in line with the market’s expectations, they wrote in a Monday note. They also foresee the reduction of the Fed’s more than $8 trillion balance sheet beginning in the third quarter, or after two rate hikes are delivered.

Economists at Goldman Sachs, meanwhile, also expect four rate increases in 2022, instead of their previous call for three, and say a runoff in the balance sheet will commence in July instead of December. “Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” they said in a note to clients.

Some strategists are adopting a much more sanguine view of the market’s outlook, despite the eminent tightening of financial conditions.

“While the next few months may be challenging and markets volatile, with each COVID wave both the public and risk markets are becoming more resilient,” wrote Seema Shah, chief strategist at Principal Global Investors, in a Monday note.

“Progress toward vaccinations should ensure the latest wave doesn’t significantly intensify supply chain bottlenecks. In turn, the most acute upward price pressures are still expected to ease through 2022,” the strategist said.

Later in the week, investors will watch the confirmation hearing of Federal Reserve Chairman Jerome Powell, followed by one for Lael Brainard, the Fed governor who has been nominated to become the central bank’s No. 2 after Vice Chairman Richard Clarida steps down.

An eagerly awaited inflation report on consumers is due on Wednesday and a report on U.S. retail sales will be closely followed on Friday.

-Mark DeCambre

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(END) Dow Jones Newswires

01-10-22 1217ET

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