Stocks were set to start September on the wrong foot, sliding lower Thursday while bond yields rose as investor sentiment was hit by new lockdowns in China and continued anxiety over inflation and the prospect of a more aggressive Federal Reserve.
Futures for the Dow Jones Industrial Average fell 150 points, or 0.5%, after the index retreated 280 points on Wednesday to close at 31,510. S&P 500 futures fell 0.7% and the tech stock-heavy Nasdaq was set to decline 1.1%.
The stock market was poised to notch a fifth straight day of declines following Federal Reserve Chairman Jerome Powell’s speech last week at Jackson Hole. Powell’s speech showed a Fed that remains committed to taming red-hot inflation by continuing to tighten financial conditions following the biggest interest-rate hikes in decades that have knocked stocks this year and raised the likelihood of a recession.
“August was rough and the new month holds precious little hope for the bulls—only technical reversals in the longer-term downtrend,” said Neil Wilson, an analyst at broker Markets.com. “It’s becoming ever clearer that central banks are taking a harder line on inflation risks and are prepared to cause pain in order to bring it down. U.S. futures are weaker again with [S&P 500 futures] back to … an area last traded at the end of July.”
The latest murmur from the U.S. central bank that added to anxiety over inflation and monetary policy came from Cleveland Fed President Loretta Mester, who said Wednesday that she sees the benchmark lending rate rising much higher—above 4%—by early 2022, where it would hold. Mester added that she didn’t anticipate the Fed cutting the fed-funds rate in 2023.
Amid rising inflation expectations, the 2-year U.S. Treasury note, which attempts to forecast the fed-funds rate a couple of years into the future, made fresh 15-year highs above 3.5%, nearing 3.51%.
The weakest trading Thursday came from Asia, with pessimism spilling into other markets amid a new lockdown in China following more than 150 Covid-19 cases reported in the city of Chengdu on Wednesday. A spate of lockdowns in the spring caused a slowdown in the world’s second-largest economy, disrupting international supply chains and exacerbating inflationary pressures.
“An important factor affecting sentiment this morning has been a new lockdown in the Chinese city of Chengdu, making it the largest city to be locked down since Shanghai earlier in the year,” said Henry Allen, an analyst at Deutsche Bank.
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