Stocks on Wall Street slid amid expectations for rate hike

Wall Street is slipping Monday in the first trading for stocks after a report raised speculation the Federal Reserve may tap the brakes a little harder on the economy.

The S&P 500 was 0.6% lower in early trading. It did not trade on Friday, when the US government said that job growth across the economy slowed a touch more than expected last month but remains resilient.

The Dow Jones Industrial Average was down 53 points, or 0.2%, at 33,432, as of 9:45 a.m. Eastern time, while the Nasdaq composite was 1.1% lower.

Stocks were catching up to the bond market, where yields rose Friday on expectations the jobs data would push the Fed to raise interest rates at its next meeting. The Fed has already hiked rates at a furious pace over the last year in hopes of driving down inflation.

Higher rates can undercut inflation, but only by slowing the entire economy in one fell swoop. That raises the risk of a recession in the future and drags down prices for stocks, bonds and other investments.

Traders are betting on a roughly 70% probability the Fed will raise its key overnight interest rate in May by 0.25 percentage points to a range of 5% to 5.25%, according to data from CME Group. A day before Friday’s jobs report, they saw a roughly coin flip’s chance that the Fed would stand pat at its next meeting.

The Fed has jacked up rates at every one of its meetings over the past year, forcing them up from near zero at the start of 2022.

In the bond market, Treasury yields were relatively stable. The 10-year yield, which helps set rates for mortgages and other important loans, slipped to 3.40% from 3.41% Friday.

While the jobs report raised expectations for another rate hike, it also showed a steady-enough labor market to bolster hopes among some investors that the Fed could pull off what’s called a “soft landing” for the economy. That’s where the Fed succeeds in raising rates just enough to stifle the economy but not so much as to create a severe recession.

The overriding bet within the bond market, though, seems to be that the economy will weaken so much that the Federal Reserve will have to cut rates as soon as this summer. Lower rates can relax the pressure on the economy and financial markets, but it also could given inflation more room to run. The Fed has so far said it sees no rate cuts happening this year.

Another report coming on Wednesday could have a bigger impact on expectations for the Fed. That’s when the U.S. government will release its latest monthly update on prices across the economy at the consumer level. Economists expect it to show inflation slowed last month but remains well above the Fed’s target.

Also this week, earnings reporting season will begin for the biggest U.S. companies. Delta Air Lines, JPMorgan Chase and UnitedHealth Group will be among the first of the S&P 500 companies to report how much profit they made during the first three months of the year.

Expectations are low, and analysts are forecasting the sharpest drop in earnings per share since the pandemic pummeled the economy in the spring of 2020.

Analysts forecast a particularly sharp drop for profits at technology companies, third-worst among the 11 sectors that make up the S&P 500, according to FactSet.

Tech stocks also tend to be among the hardest hit by higher interest rates, which often hurt the riskiest and highest-growth stocks the most.

Apple and Microsoft were among the heaviest weights on the S&P 500 Monday. Apple dropped 2.7%, and Microsoft fell 2%.

Tesla fell 3.7% in its first trading after the electric-vehicle company cut prices on its entire U.S. model lineup for the third time this year. It’s apparently trying to entice more buyers amid rising interest rates, which make auto loans more expensive.

In markets abroad, stocks were mixed across Asia.

Japan’s Nikkei 225 added 0.4% after the new governor of Japan’s central bank signaled he plans no drastic changes in its ultra-low interest rate policy.

In Europe, many stock markets were closed.

Oil slipped on Monday, after rising for three straight weeks, as concern about further interest rate hikes that could curb demand balanced the prospect of a tighter market due to supply cuts from OPEC+ producers.

The U.S. dollar rose after U.S. jobs data pointed to a tight labour market, firming up expectations of another Federal Reserve rate hike. Dollar strength makes oil more expensive for other currency holders and can weigh on demand.

Brent crude was down 9 cents, or 0.1%, at $85.03 a barrel by 1351 GMT on Monday, after earlier falling $1. U.S. West Texas Intermediate slipped 15 cents, or 0.2%, to $80.55.

“Those who were bearish are questioning the demand outlook in light of the cuts, whilst clearly those who were bullish are now seeing even a tighter market over the second half,” ING’s head of commodities research Warren Patterson said.

“I am in the latter camp and still see prices moving higher from here as we go through the year.”

Crude last week jumped more than 6% after OPEC+, the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, surprised the market with a new round of production cuts starting in May.

Adding to tightness in supply has been a shutdown of Iraq’s northern exports. A deal was signed last week to restart the flows, but as of Thursday they hadn’t resumed.

Oil also drew support from a steeper-than-expected drop in U.S. crude inventories last week, as well as a decline in gasoline and distillate stocks, hinting at rising demand.

In global financial markets, a U.S. inflation report to be released on Wednesday could help investors gauge the near-term trajectory for interest rates.

Agencies