Equities are getting hit on Thursday, and investors are wondering what has stocks trending down today. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is down about 0.75%, while the Invesco QQQ Trust (NASDAQ:QQQ) is down about 0.7%.
Why are stocks down today? The prospect of interest rates going higher than previously expected for longer than previously forecast is the main catalyst.
For the last two days, investors and trading algorithms have been hanging on virtually every word coming from Fed Chairman Jerome Powell. His two-day testimony in front of Congress has been in focus, given the impact it could have on higher interest rates.
While the market didn’t do much on Wednesday — rallying 0.14% following a late-day rebound — it fell hard on Tuesday. The S&P 500 dipped 1.5% that day as investors realized the likelihood of higher interest rates.
To be clear, Powell would not commit to more aggressive rate hakes. He only said that if the data warranted it, they would do so.
Specifically, he noted that, “If — and I stress that no decision has been made on this — but if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
However, he also said that, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
The market is now pricing in a higher likelihood of a 50-basis-point increase this month instead of a 25-basis-point increase. The latter was the base-case assumption just one week ago. The Fed’s decision will come on Wednesday, March 22.
Stocks Are Down Today, But What About Tomorrow?
Well, that’s impossible to say without knowing the non-farm payrolls report. Typically released on the first Friday of every month, the report will be released on Friday before the open. Last month, this figure was explosively higher than expected (more than double above the consensus).
It sparked worries that the economy would keep running too hot and, thus, that the Fed would keep raising rates. That fear was stoked even more after hot Consumer Price Index (CPI), Producer Price Index (PPI) and Personal Consumption Expenditures (PCE) reports later in the month.
Surprisingly though, the market has handled that information quite well. That’s even as interest rate expectations continued to rise before the Powell testimony.
We don’t know whether the stock market will rally on Friday or not. What’s actually important is how the data comes in this month. It starts off with Friday’s jobs report, followed by the CPI report on Tuesday, March 14, and the PPI report on Wednesday, March 15.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
