Treasury Yield Curve and Dollar Keep Rising, Could Provide More Pressure

(Thursday Market Open) Yesterday was all about the Fed. Today, it looks like it’s all about sweeping up the mess left behind by the Fed’s rate hike, economic projections, and Chairman Jerome Powell’s hawkish press conference.

However, it’s not a given that we’re in for a soft day. Keep an eye on how we trade Thursday, because it’s not unusual to see the market reverse in an initial post-Fed turn-around after the market has a night to think and digest. It seems like some of that digesting did happen, judging from how stock index futures began moving slightly into the green from previous losses in the hour ahead of the open.

The fact that so far is that we’re not seeing a lot of follow-up selling is noteworthy. On the flip side, the dollar has strengthened even further since the Fed’s move, and dollar strength is a big problem for the world economy. The Bank of Japan is intervening to support the yen vs. the dollar for the first time in about 20 years.

As noted here late yesterday, the market is now repricing a much more hawkish Fed that seems committed to getting inflation down at all costs.

In the wake of the meeting, a lot of analyst notes hit the tape trying to translate the dot-plot into an actual story, which looks hard to do for the moment. Some of the early feedback sees analysts wondering if the Fed will continue sounding hawkish if gross domestic product (GDP) starts to go negative (in the dot-plot it stays positive). They also wonder if unemployment can stay as low as the Fed projects at below 5%.

These observations aren’t coming from just a handful of commentators. There are some pretty big asset managers saying these things, and if they change their investment policies as a result, it could drive more volatility.

As a reminder, the Fed’s projected “terminal rate,” or the highest rate it now predicts for the current rate hike cycle, rose to 4.6% in 2023 on the Fed’s new dot-plot, which is higher than some analysts predicted and up from the Fed’s June projection of 3.8%.

The Fed lowered its projection for 2023’s U.S. gross domestic product (GDP) growth to 1.2% from June’s 1.7% projection, and it reduced the 2024 GDP projection to 1.7% from the previous 1.9%. For this year, the Fed now expects anemic 0.2% GDP growth, well below the 1.7% it had previously projected.

The Fed also raised its projection for unemployment in 2023 and 2024, now seeing it topping out at 4.4% in both years, up from the prior 3.9% and 4.1%. The Fed doesn’t see inflation coming down to near its 2% target until 2024 and 2025.

And more hikes are almost certainly on their way, judging from the CME’s FedWatch Tool. By early today, it showed a 71% chance of the Fed initiating another 75-basis-point hike at its next meeting in early November, and only a 28% chance of a lesser hike of 50 basis points.

Looking ahead to next March, the FedWatch Tool shows a better-than-50% chance of the Fed’s overnight rate sitting between 4.5% and 4.75%, roughly in line with the Fed’s median 4.6% projection for next year’s rates.

Potential Market Movers

Earlier this week it was housing taking a hit. Today it’s casual dining, as Darden Restaurants DRI shares slipped following the company’s earnings report despite a decent rise in same-store sales during the quarter. Shares fell 2.5% in the hours before the opening bell. Earnings per share met Wall Street analysts’ expectations, but revenue appeared a bit lighter than some estimates had expected. The company did reiterate financial guidance.

Target TGT failed to find support early Thursday despite announcing its earliest holiday savings campaign ever and a plan to hire 100,000 seasonal team members. This follows yesterday’s disappointing news that Walmart WMT would hire only 40,000 holiday season workers. Speaking of retail, Costco (COST) is expected to report earnings after the close.

From a sector standpoint, Energy appears a bit firmer this morning, with crude oil ticking slightly higher in overseas trading ahead of the U.S. open amid concerns around Russia’s Ukraine campaign. Protests rocked several Russian cities last night after President Vladimir Putin ordered a partial military call-up. Also, Hurricane Fiona might be giving the crude market some jitters.

Turning to news from across the water, the Bank of England raised interest rates by 50 basis points, in a move that had been pretty widely expected.

We’re in a mild data lull following this week’s Fed fireworks. The main report today was initial weekly jobless claims, which came in at a mild 213,000. That was below the Wall Street consensus of 220,000, according to This will be a more important report to watch in coming weeks with many analysts worried that the latest round of Fed rate hikes could hurt the economy and leave more people jobless. In one sign of the growing economic uncertainty, the closely followed curve between the 2-year Treasury note and the 10-year Treasury note (TNX) extended to about 53 points early Thursday, the steepest it’s been in decades. Both yields remain near this week’s highs.

Reviewing the Market Minutes

The major indexes slid immediately after the Fed’s announcement yesterday, but then actually recovered a bit before diving again in the last half hour.

The Nasdaq ($COMP) fell 1.79% to 11,220; the S&P 500® index (SPX) fell 1.71% to 3,789, and Dow Jones Industrial Average ($DJI) finished down 1.7% at 30,183.

Among sectors, many of the so-called “growth” areas got slammed the hardest, as they could be the most vulnerable to a hawkish Fed. Every sector took a beating, but Financials, Consumer Discretionary, Communication Services, and Materials fell the most, all dropping more than 2%.

Among individual stocks, few escaped the carnage.  And Treasury yields, which initially were all over the place after the Fed’s release, finally ended up near their daily highs yesterday, with the 10-year Treasury yield finishing above 3.6% and the rate-sensitive 2-year Treasury yield ending near 4.1%.

Some of the major stocks losing ground Wednesday included Apple AAPL, which fell 2%; Amazon AMZN down 3%, Disney DIS, down nearly 3%, and Tesla TSLA, down 2.5%.

General Mills GIS was one of the few major gainers, rising 5% on solid earnings.

Nvidia NVDA also rose slightly after its Global Technical Conference.

CHART OF THE DAY: This chart of the S&P 500 Index (candlestick) vs. 10-year Treasury yields tells the story of how Fed rate increases have continued pushing down stocks over the last six months, despite that summer rally. Data Source: S&P Dow Jones Indices, CME Group. Chart source: the thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

WHAT THE FED CAN’T DO: While the Fed can use quantitative easing and rate hikes to try to slow down inflation, one thing it can’t do is control company supply chains or stop COVID-19 from slowing down shipping. This week’s bearish announcement from Ford (F) about continued supply chain issues reinforced the economy simply isn’t past the COVID-19-related slowdowns.
Though the U.S. economy has gotten back up to speed in many ways, China continues to see pandemic shutdowns, sometimes of entire cities. That, along with the Russian invasion of Ukraine, has helped keep inflation on the front burner and may be leading to weaker expectations for the U.S. economy, Fed hikes aside.

HOLIDAY SEASON ALREADY? On Wednesday, there was an important sign of company caution going into retailing’s all-important fourth quarter. Walmart (WMT)announced it would hire 40,000 workers for the holiday season. Sounds pretty bullish until you consider the fact that a year ago, WMT hired 150,000 holiday season workers, according to Reuters.
While WMT didn’t say why it limited its hiring compared with a year ago, one aspect of the decision could be inflation. It simply costs companies more to pay workers now than at this time in 2021. With inflation still at 40-year highs, it seems unlikely we’ll see wage pressure deflate anytime soon, unless of course the country hits a recession. Even then, remember that inflation can be very “sticky,” especially when it comes to wages.

The holiday shopping season won’t be in full swing for a couple more months. But WMT’s more modest hiring decision could be another sign that retailers aren’t expecting a massive shot in the arm from customers, many of whom have been fighting inflation all year.

CHARGING AHEAD: Speaking of shopping, for those with credit card balances, 2022 has not been a good year. According to, the average annual percentage rate on cards is now 18.1%—and that doesn’t include the potential impact of  Wednesday’s latest rate hike by the Fed. We’re now at the highest average card rate since January 1996.

Notable Calendar Items

Sep 23: S&P U.S. manufacturing and services PMI, scheduled public appearances for Fed Chairman Jerome Powell and Fed governor Michelle Bowman

Sep 27: Durable goods orders, CB consumer confidence, New home sales and earnings from Cintas (CTAS), Jabil Circuit (JBL), BlackBerry (BB), Cal-Maine Foods (CALM), and Cracker Barrel (CBRL)

Sep 28: Pending home sales and earnings from Paychex (PAYX)

Sep 29: Gross Domestic Product (GDP) and earnings from Nike (NKE), Micron (MU), CarMax (KMX), Carnival (CCL), and Bed Bath & Beyond (BBBY)

Sep 30: Personal Spending, Chicago PMI, Michigan Consumer Sentiment

Oct. 3: September ISM Manufacturing PMI

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

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