Treasury Yields Fall Ahead of Powell’s Testimony
March 8, 2023Treasury Yields Fall on ADP Jobs Data
March 8, 2023U.S. stocks tumbled Tuesday, with the S&P 500 index SPX, -1.44% skidding below a key resistance level, as Federal Reserve Chairman Jerome Powell spooked investors with talk of the potential need for higher interest rates to combat stubbornly elevated levels of inflation.
Fed Chair Powell told members Congress that strong economic data could trigger the need for higher interest rates than previously anticipated, while also leaving the door open for a bigger 50 basis point increase to the fed-funds rate in March.
During Powell’s testimony, 2-year Treasury yields pushed above 5%, the highest level since 2007, while the S&P 500 index broke below its 50-day moving average, leading to another leg lower for the other major indexes.
Read: Fed’s Powell puts stock investors on notice: Hot data may mean bigger rate hike
“I think it was comments from Powell about the economy being somewhat strong and inflation sticking around,” said Robert Pavlik, a senior portfolio manager at Dakota Wealth Management. “As the day has worn on,” he said, “Momentum has moved to the downside.”
Pavlik pointed to the 2-year Treasury yield’s TMUBMUSD02Y, 5.010% climb above 5%, as a catalyst for the downdraft in stocks, while also the S&P 500 dropped below 3,994.19, its 50-day moving average.
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“A lot of eyes are on that,” he said.
Stock-market investors closely watch the S&P 500’s 50-day moving average as a potential signal of an upward trend when it is exceeded, but also for a downward shift when it falls below the average.
The last time the index fell below its 50-day moving average was March 2, according to Dow Jones Market data. Stocks still managed to end last week higher, but the main three indexes were on pace for weekly declinces of 1.4%-1.5% through Tuesday, according to FactSet.
“In the short term, it probably means stocks have a bit lower to go,” said Peter Cardillo, chief market economist at Spartan Capital Securities, particularly with the monthly U.S. February nonfarm payroll report due Friday, and after January’s job report came in much stronger than anticipated.
The 2-year Treasury yield is sensitive to the Fed’s benchmark policy rate, which has increased by 4.5 percentage points in the past year. However, the 10-year Treasury rate TMUBMUSD10Y, 3.971% was knocking on the door of 4% on Tuesday, signaling a deep inversion of the Treasury yield curve, a reliable predictor of past recessions.
“That’s a clear sign of recession,” Cardillo said of the yield-curve’s deeper inversion on Tuesday. “That, in itself, means inflation will come down.”
The S&P 500 index was down 1.5% at last check, according to FactSet, while the Dow Jones Industrial Average DJIA, -1.63% was 1.6% lower and the Nasdaq Composite Index COMP, -1.17% was down 1.4%.
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