Stocks plummet on rate hikes, weak retail sales rattle markets

US stocks tumbled Thursday as Wall Street reeled from another significant rate hike by Federal Reserve officials and assessed similar moves by monetary policymakers across the Atlantic. A disappointing reading on consumer spending also raised concerns about the health of the US economy.

The European Central Bank and the Bank of England followed the US Fed in raising interest rates by 50 basis points on Thursday morning. The BoE’s rate hike took interest rates in the country to their highest level since 2008. Indications from each of the banks that further tightening is underway offset optimism about peak inflation.

The S&P 500 (^GSPC) fell 2.5%, while the Dow Jones Industrial Average (^DJI) lost more than 750 points, or 2.3%, recording its worst day in three months. The technology-heavy Nasdaq Composite (^IXIC) fell 3.2%.

US Treasury yields fell slightly, with the 10-year benchmark falling below 3.5%. The US dollar index skyrocketed and oil prices fell, with West Texas Intermediate (WTI) crude oil futures trading near $76 a barrel.

Christine Lagarde, president of the European Central Bank, echoed a hawkish tune from Fed Chairman Jerome Powell after the monetary authority’s interest rate decision.

“Anyone who thinks this is a pivot for the ECB is wrong,” Lagarde said at a news conference. “We should expect to raise interest rates by 50 basis points over a period of time.”

“We’ve got more ground to cover, we’ve got longer to go and we’re in for a long game,” she said.

Meanwhile, the US government’s retail sales report showed spending fell sharply in November as the main holiday shopping season kicked off. The latest measurement of retail sales showed a 0.6% drop from the previous month, but an increase of 6.5% from the same period last year.

“Black Friday and Christmas shopping were not enough to save retail sales last month as they fell the most this year and fell well below expectations,” Mike Loewengart, chief model portfolio builder at Morgan Stanley, said in a note.

“Consumers have been resilient amid hot inflation and rising rates, but high prices and rumors of a recession could lead some to reach for their wallets in second place,” he added. “It’s been a busy week for investors with rate hikes from both the Fed and ECB, so it shouldn’t come as a surprise to see a shaky market.”

While a slowdown in retail spending signaled economic weakness, a new economic release early Thursday underlined continued tightness in the labor market. The number of applications for unemployment insurance unexpectedly fell last week to the lowest level since September. Initial jobless claims, the most up-to-date snapshot of the U.S. employment situation, stood at 211,000 for the week ended Dec. 10, down 11,000 from the previous week’s revised level, according to Labor Department data.

On the company front, Tesla (TSLA) stock stabilized Thursday after all-week declines, even as a filing showed CEO Elon Musk sold about 21,995,000 shares of the company, or worth about $3.6 billion, during the three-day period which ended on December 14. Shares of Tesla are down about 20% so far in December and about 55% year-to-date after the electric vehicle giant’s sell-off accelerated in recent days.

Shares of Lennar (LEN) also moved higher after previous losses following the homebuilder’s earnings late Wednesday, which showed an 11% increase in fourth-quarter earnings. Lennar closed 3.8% higher.

Thursday morning’s moves follow declines across key averages in the previous trading session after the Fed hiked its benchmark interest rate by 50 basis points. Powell also stressed that he and his colleagues will continue to raise rates in 2023 to an upwardly revised expected final interest rate of 5.1%.

Wednesday’s 0.5 percentage point hike, which took the Fed Funds rate to a range of 4.25%-4.5%, marked a slowdown from the 75 basis point increases at each of the past four policy meetings of the year. the Fed – the most aggressive series of hikes since the 1980s.

Despite a slowdown in the pace and magnitude of the increases, Powell persistently argued that his and his colleagues’ work in tackling stubbornly high inflation was far from over.

Federal Reserve Board Chairman Jerome Powell holds a press conference following the announcement that the Federal Reserve has raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, US, on Dec. 14, 2022. REUTERS/Evelyn Hockstein

“Now that we’ve raised interest rates by 425 basis points this year and we’re in restrictive territory, it’s not so important now how fast we go – it’s much more important to think: What’s the final level?” Powell said that on Wednesday during a press conference with reporters. “At a certain point, the question becomes, how long will we remain restrictive?”

The Fed’s “dot plot,” which shows policymakers’ estimates for interest rates, showed the expectation that the federal funds rate will rise to between 5.1% and 5.4% in 2023 and remain at a median interest rate of 4.1% will be compared to a previously estimated interest rate. 3.9% – a change strategists point to the biggest surprise revision to the central bank’s outlook.

“These estimates are significantly more aggressive than their previous forecasts and were not tracked far in advance, as is normally the case with the Fed,” William Blair macro analyst Richard de Chazal said in a note.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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