Tech stocks led a broad equity retreat Thursday, as Wall Street fretted about the hawkish message sent out by the Federal Reserve alongside its decision to hold interest rates steady.
The S&P 500 (^GSPC) sank 1.6%, after losing almost 1% on Wednesday, and the Dow Jones Industrial Average (^DJI) dropped 1%. The tech-heavy Nasdaq Composite (^IXIC) fell about 1.8% to continue to lead the declines.
After combing through the central bank's forecast, investors believe its policymakers see interest rates staying "higher for longer." The debate is over just how long that "longer" will be, given the central bank signaled another hike at one of its final two meetings this year. Goldman Sachs has pushed back its forecast for a Fed rate cut to the fourth quarter of 2024.
The prospect of a prolonged period of elevated rates has spooked some investors, as that would put pressure on stocks and bonds. The yield on the benchmark 10-year Treasury rose on Thursday, at one point touching its highest level in over 15 years.
However, Fed Chair Jerome Powell stressed policy will be dependent on economic data in his press conference. Official figures out Thursday showed jobless claims last week fell to their lowest level since January, the latest sign of strength in the US labor market.
The Bank of England decided to hold interest rates steady on Thursday, pausing tightening after hiking 14 times in a row after an unexpected slowdown in inflation. Elsewhere in European central banks, there were a couple of surprises: The Swiss National Bank kept its rates on hold while Norway's central bank signaled it could follow September's hike with another in December.
In individual stocks, shares of FedEx popped after a big quarterly profit beat.
Dow loses more than 300 points after Fed signals higher rates for longer
Wall Street suffered a second day of losses as the Fed's hawkish posture to get inflation under control signaled that elevated rates are here to stay for years to come.
Hollywood studios and striking writers meet for 2nd day
After a month of no communication, negotiators for the Hollywood studios and for the Writers Guild of America have resumed talks for a second day, in a significant move that signals potential for a deal after nearly 150 days of a strike.
The historic dispute has centered on pay, working conditions, and a rethinking of worker royalties in the streaming era. Artificial intelligence, and worker protections against the way studios wield the technology, has surfaced as another sticking point.
A new poll found Americans broadly support striking workers in Hollywood and in the auto industry, where workers are collectively protesting against the big three automakers. Sixty percent of Americans support the strikes by screenwriters and actors to win better pay and protections in the entertainment industry, while 27% oppose it and 13% were unsure, according to a Reuters/Ipsos poll published Thursday.
The most important word for the Fed is 'real'
As interest rates have risen, most investor and public attention has been on the absolute level of rates.
And with good reason.
But the Federal Reserve isn't just looking at these eye-popping headlines in thinking about its next steps, but also at where these rates stand when adjusted for inflation.
Referred to as "real" interest rates, the Fed's aggressive rate hikes earlier this year pushed real rates into positive territory for the first time since 2019.
Looking at the fed funds rate minus the annual change in core PCE — the Fed's preferred inflation measure — we can see that real rates haven't been positive for an extended period since the mid-2000s.
What we think this chart also gets across is that by saying things like "higher for longer," what the Powell Fed is really trying to do is prepare investors for a future that looks more like the Fed's past.
Throughout the 1980s and 1990s, for instance, real rates were almost always positive. The initial push to bring real rates into positive territory over these decades was the Paul Volcker-backed moved to crush persistent inflation, it was ultimately a long period of economic growth that kept real rates positive.
And strong economic growth is exactly what Fed Chair Jerome Powell pointed to on Wednesday as the catalyst for the Fed raising its interest rate forecasts for the coming years.
And though it is somewhat obvious to note that higher interest rates can only be sustained by a strong economy, recall that what began the current regime of rising interest rates was inflation that surged coming out of the pandemic. Inflation that was driven in part by supply chain problems, in part by strong economic growth coming out of the pandemic, and in part by consumers having excess cash in the wake of a highly unique fiscal response to the pandemic.
But as the economy transitions away from pandemic-era trends, so too does economic and monetary policy move off these benchmarks.
For investors, the renewed focus on real rates from the Fed means the central bank can get policy tighter by two paths — either rates rise, or inflation falls while rates stay steady. On this count, the Powell Fed now has more flexibility.
Eight percent mortgage rates 'possible' in the near term
The housing market might be getting even worse for prospective buyers.
Yahoo Finance's Gabriella Cruz-Martinez reports that NAR chief economist Lawrence Yun said on a press call that "in the short run, it's possible that mortgage rates may go up to 8%."
Rates have stayed higher than 7% for more than a month, keeping buyers on the sidelines and sellers from moving elsewhere. The Federal Reserve indicated Wednesday that it would keep interest rates higher for longer in its quest to bring down inflation.
Yun's comments followed the release of data showing that existing home sales fell 0.7% in August from the previous month, falling short of economists' estimates of a 0.7% increase.
Read more here.
Afternoon trending stocks
Here are some of the stocks on Yahoo Finance’s trending tickers page in afternoon trading on Thursday:
Eli Lilly (LLY): The drug maker's stock was down 4% after the company said earlier this week that it was suing 10 medical spas, wellness centers and compounding pharmacies for selling unauthorized versions of its diabetes drug Mounjaro, which is expected to be approved for weight loss later this year.
NVIDIA (NVDA): The chip giant's shares were down 2%, as several rate-sensitive stocks took a hit after the Fed’s hawkish pause.
Stocks fall in afternoon trading
Wall Street lost more ground Thursday afternoon as investors grappled with the Fed’s hawkish signals of extending elevated rates further into the future.
Jobless claims unexpectedly fall in another sign of resilience
The number of Americans who applied for unemployment benefits last week dropped by 20,000, registering the lowest figure since January, in another sign of a resilient labor market even as the Federal Reserve pushes ahead with its tightening campaign.
New jobless claims came in at 201,000, according to data the Labor Department released on Thursday, beating expectations of 225,000. It was another stronger-than-expected reading in the face of elevated interest rates.
Central bankers are closely watching for signs of weakness in the labor market as they attempt to pull down historic levels of inflation. Unemployment claims tend to rise as the economy weakens, which can foreshadow a recession. Jobs figures have proven robust in recent months, however, fueling hopes that the Fed's tightening won't unleash a wave of layoffs or otherwise trigger a widespread economic downturn. On the contrary, Fed Chair Jerome Powell said Wednesday during a much-anticipated policy press conference that he's looking out for more strong economic activity, which could prompt the Fed "to do more with rates."
The Fed has warned about the stronger-than-expected US economy, and central bankers are now projecting the economy to grow 2.1% this year up from June's 1.0% projection.
Fox, News Corp stocks rise after Chair Rupert Murdoch steps down
Investors at Fox (FOXA) and News Corp. (NWS, NWSA) seemed pleased after the companies announced Thursday that Chair Rupert Murdoch stepped down from his leadership roles, punctuating a career that forged a global media empire over the span of seven decades and shaped the modern era of news media. Murdoch's eldest son Lachlan, who had served as co-chair of News Corp, will become chair of that company and continue as executive chair and CEO of Fox.
Lachlan's ascension has ended questions of his father's succession and solidifies Lachlan's role as the empire's new leader. Fox shares rose by more than 2% and News Corp gained 0.8% during morning trading on Thursday.
“For my entire professional life, I have been engaged daily with news and ideas, and that will not change. But the time is right for me to take on different roles,” Murdoch wrote in a memo to staff. Murdoch, 92, will be appointed chair emeritus of both companies.
Stocks trending in morning trading
Here are some of the stocks leading Yahoo Finance’s trending tickers page in morning trading on Thursday:
Splunk (SPLK): Splunk's shares surged by more than 20% in morning trading after the AI and data-focused cloud computing company agreed to a $28 billion takeover by Cisco (CSCO), which fell by 3%. The all-cash offer to buy Splunk at $157 per share meant the deal priced in a 30% premium. "For Cisco this is a shot across the bow at Palo Alto, Checkpoint, Crowdstrike, Microsoft, Zscaler and others that the tech stalwart is not sitting idle in this market and now is making an aggressive play to gain market share in the coming years," said Wedbush Analyst Dan Ives in a note on Thursday.
FOX (FOXA) and News Corp. (NWS, NWSA): Investors at Fox and News Corp appeared to take heart after the companies announced Thursday that Chair Rupert Murdoch stepped down from his leadership roles, ending a career that spanned more than seven decades and forged a global media empire. Murdoch's son Lachlan will become the sole chair of both boards. The transition put to rest questions of Murdoch's succession and solidifies Lachlan's role as the empire's new leader. Fox shares rose by nearly 3% and News Corp gained 0.8%.
Stocks open lower after the Fed signals longer tightening cycle
The sour sentiment on Wall Street continued through the opening bell Thursday as investors digested the Fed’s hawkish message of keeping rates higher for longer.