Dow snaps 3-day losing streak after Fed chief Powell says the peak policy interest rate may be higher

U.S. stocks fell sharply on Tuesday afternoon, giving back earlier gains, after Federal Reserve Chair Jerome Powell said that the inflation will decline significantly in 2023, but added that more interest-rate hikes will be necessary as the policy rate is still not “restrictive” enough to wrestle rapid inflation under control.

What’s happening

The Dow Jones Industrial Average

fell 204 points, or 0.6%, to 33,685.

The S&P 500

gained 15 points, or 0.4%, to 4,095.

The Nasdaq Composite

was down 33 points, or 0.2%, to 11,862.

On Monday, the Dow Jones Industrial Average

fell 35 points, or 0.1%, to 33,891, the S&P 500

declined 25 points, or 0.61%, to 4,111, and the Nasdaq Composite

dropped 120 points, or 1%, to 11,887.

What’s driving markets

U.S. stock indexes reversed gains and fell to session lows following Fed Chair Powell’s remarks during an interview with David Rubinstein, the co-chairman of private-equity giant The Carlyle Group, at the Economic Club of Washington, D.C.

Stocks initially turned positive after Powell reiterated that the disinflationary process has begun, yet it will still take time to get to the 2% inflation target.

“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” said Powell. “But it has a long way to go. These are the very early stages.”

However, the three major U.S. stock indexes started trimming gains and traded sharply lower after Powell said more interest-rate hikes will be necessary, and surprisingly strong economic data like last Friday’s employment report could force the central bank to raise its policy interest rate more than investors have priced in.

“The reality is we’re going to react to the data, so if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in,” Powell said.

Last week, the U.S. Labor Department reported a 517,000 surge in nonfarm payrolls, as well as a drop in the unemployment rate to 3.4%. Interest-rate futures implied a terminal Fed rate of 5.157%, which according to Deutsche Bank was the first new high since early November.

Neel Kashkari, president of the Minneapolis Fed, set the stage Tuesday with calls to raise rates aggressively. Kashkari, who spoke in a CNBC interview, is a voting member of the Federal Open Market Committee, which sets the benchmark interest rate.

On Monday Atlanta Fed President Raphael Bostic told Bloomberg that the jobs report means interest rates may have to rise more than he’s previously forecast. Bostic is not an FOMC voting member.

Besides the Powell speech on Tuesday, Fed Vice Chair for Supervision Michael Barr is also scheduled to speak Tuesday at 2 p.m. ET also.

Then there’s President Joe Biden’s State of the Union address Tuesday evening. Engelke is hoping for conciliatory statements from Biden on bipartisan work to raise the debt ceiling, but he’s not holding his breath.

Meanwhile, U.S. data on international trade showed America’s trade deficit hit a record $948.1 billion last year. It’s the third straight year for an all-time deficit, with the trade gap widened by steep oil prices and steep consumer appetite for new cars, cell phones and other products. The 2022 deficit is a 12% increase from 2021’s trade deficit.

Data on U.S. consumer credit is also expected Tuesday afternoon.

Companies in focus

Bed Bath & Beyond

shares slumped more than 45%, after seeing strong gains Monday before the retailer said it plans to sell convertible preferred stock as well as warrants to purchase common shares and convertible preferred stock in a move to raise at least $225 million initially and ultimately more than $1 billion.

Hertz Global Holdings

 gained more than 7% after the car rental company reported fourth-quarter profit that dropped from last year but topped expectations, aided by a post-pandemic demand recovery. 

DuPont de Nemours Inc.

shares are up roughly 5% after the chemical company beat fourth-quarter estimates, even though forward guidance didn’t live up to analyst expectations. For this year’s first quarter, Du Pont is expecting adjusted EPS of 80 cents and sales of $2.9 billion, while FactSet consensus called for EPS of 88 cents and $3.1 billion in sales.

Royal Caribbean Group

shares are up more than 2% after the cruise operator reported a smaller-than-expected fourth-quarter loss and a rosy outlook for 2023.  “Leisure travel strength continues as consumer spend is shifting towards experiences, with cruising remaining an attractive value proposition,” said Chief Executive Jason Liberty.

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