After a brief technical rebound on Wednesday, in reaction to the slightly less aggressive tone than expected from the Fed, the American market fell back into bright red on Thursday, after the announcement of a sharp drop in productivity in the 1st quarter in the United States , raising fears of a further acceleration in inflation. Government bond rates jumped, the US 10-year yield now pointing to 3.1%, while the dollar rose to a 20-year high against the major currencies. Oil remains firm after the status quo of OPEC+ on its production policy.
Two hours before closing, the Dow Jones fell 3.18% to 32,978 points, after a jump of 2.8% the day before, while the broad S&P 500 index lost 3.6% to 4,145 pts, after – 3% Wednesday. The Nasdaq Composite, rich in technology and biotech stocks, dropped 5% to 12,309 pts, after climbing 3.2% on Wednesday. The VIX volatility index rebounded more than 20% to 30.60 pts, well above its 200-day moving average (21).
US productivity at half mast, labor costs soar
The markets were somewhat relieved on Wednesday by the tone of the Fed: even if the central bank raised its main key rate by half a point, to 0.75%-1.00%, its president Jerome Powell seemed rule out even larger moves of 75 basis points in future meetings. The reduction in the Fed’s balance sheet will begin on June 1, but at a gradual pace, a little slower than anticipated by the markets.
However, the productivity figures for the 1st quarter published on Thursday revived fears of a wage-price spiral, which would sustain the rise in prices for a long time. Non-farm productivity, which measures output per hour per worker, thus plunged at an annualized rate of 7.5% in the last quarter, its biggest drop since the third quarter of 1947! It follows a growth rate of 6.3% in the fourth quarter of 2021. The productivity figures have been quite difficult to interpret since the coronavirus crisis, but this Thursday they contributed to the ambient pessimism.
Unit labor costs soared by 11.6% (unheard of since 1982), against +9.9% expected after a rise of 0.9% in the previous quarter. The imbalance in the labor market is forcing employers to raise wages, contributing to soaring inflation.
The job market is showing signs of slowing down
On Wednesday, Fed Chairman Jerome Powell told reporters that “the labor market is extremely tight, and inflation is way too high,” but at the same time he ruled out a wage-price spiral, and indicated that the Fed is not “actively” considering raising rates even more massively by 75 basis points at its next meetings.
While Jerome Powell’s more ‘dovish’ tone than expected at the press conference following the Federal Reserve’s announcement was initially welcomed, the fact remains that fears of inflation and economic slowdown against a backdrop of war in Ukraine, the health crisis in China and less accommodating monetary policies are far from over. While waiting for the monthly employment figures on Friday, the latest data on the job market are also not very good.
In addition to the collapse in productivity, which reflects the rise in unit labor costs, operators learned of a surprise increase in weekly jobless claims, while the latest private employment data released on Wednesday by ADP were also rather gloomy. For the week ended April 30, unemployment claims thus reached 200,000, up 19,000 from the previous week, while the consensus was positioned at 180,000.
The 10-year T-Bond now yields 3.1%!
To make matters worse, if the quarterly results are generally solid on Wall Street, the forecasts of several companies have clearly disappointed in recent days, like those of eBay in e-commerce.
On the bond markets, yields are again trending up sharply. The 10-year T-Bond rate jumped 18 basis points to 3.10%, its highest since November 2018. The 2-year T-Bond rate, which is more sensitive to monetary policy, climbed for its part by 11 bps at 2.73%.
The dollar, which had fallen on Wednesday after the announcements of the Fed, is rising sharply to its highest levels for 20 years. The dollar index, which measures its evolution against a basket of reference currencies, climbed 1.17% to 103.79 points. For its part, the euro lost 1.1% to $1.0505.
Gold rallied 0.3% to $1,875.70 an ounce for the June Comex futures contract. On the crypto side, bitcoin fell 7.4% over 24 hours, around $36,825 on Coindesk.
OPEC+ maintains its policy of gradually increasing its production
Finally, oil prices remain firm after the European Commission proposed a full embargo on Russian oil as part of the bloc’s sixth round of sanctions against Russia over the offensive launched in Ukraine. A barrel of US WTI light crude (June futures) climbed 0.06% to $107.88 on the Nymex, while North Sea Brent rose 0.4% to $110.66 for the July contract.
Unsurprisingly, OPEC and its allies have just agreed on a small monthly increase in their crude production. The cartel validated a ‘standard’ increase of 432,000 barrels per day in June. A limited volume in the current context but which many analysts doubt will be reached while most members are facing capacity constraints. “The steady buildup of OPEC supply since mid-2021 appears to be running out of steam,” said Bill Farren-Price, director of Enverus Intelligence Research. “With supply risk increasing as Russian sanctions mount, the organization’s ability to stabilize oil prices is evaporating.”
VALUES TO FOLLOW
* Booking jumped 3.4%. The accommodations site reported first-quarter earnings that beat analysts’ expectations and said it expected a buoyant summer season, particularly in Europe.
* Twitter (+3.1%). Elon Musk has secured an additional $7.14 billion in funding from a group of investors including Oracle co-founder Larry Ellison to fund his acquisition of Twitter, a document obtained by Reuters shows. Among the investors participating in this operation, we also find Binance, Brookfield Asset Management, Fidelity Management & Research and Qatar Holding. Separately, Twitter received a chilly reception on Wednesday night when it presented a plan to advertisers at an event in New York, three ad agency executives reported, as the social network’s plans were uncertain. since the announcement of its takeover.
* eBay fell 11%, weighed down by disappointing guidance. In the second quarter, the American market place, anticipates a turnover of between 2.35 and 2.40 billion dollars against 2.54 billion dollars anticipated by analysts. Its forecast for the full year also came in below market estimates. Adjusted EPS for the three months to the end of June is also expected between 87 and 91 cents against a consensus of $1.02.
After profiting from the health crisis, online retailers are seeing their growth slow as consumers return to stores as stubbornly high inflation begins to undermine household morale. In the first three months of the year, gross merchandise volume — a figure heavily tracked in the e-commerce industry — fell 20% to $19.4 billion. Active buyers on eBay fell 13% to 142 million in the quarter. Adjusted EPS reached $1.05 ($1.04 expected) for revenues down 6% to $2.48 billion ($2.46 billion consensus).
* Chesapeake Energy (-1.2%). The investment company Kimmeridge announced on Wednesday that it had taken a 1.5% stake in the capital of Chesapeake Energy and had started discussions with the group’s management in order to boost its share price.
* Berkshire Hathaway (-2.5%). Warren Buffett increases his bet on the American oil group. The Wall Street guru’s firm bought back an additional 5.9 million shares of Occidental Petroleum for about $336 million, raising its stake in the company to 15.2%, a stock market notice released late Wednesday showed. The shares were purchased on May 2 and 3 at a unit price between $56 and $58.37. Occidental, the best-performing stock on the S&P 500 in the first quarter, saw its shares soar on rising oil prices and buybacks of W. Buffett.
* Metlife (-1.6%). The insurance company on Wednesday published a better-than-expected profit for the first quarter thanks to higher premiums and commissions.
* AT&T (-0.2%), Verizon Communications (-1.2%), Comcast (-2.5%). Broadband internet service providers in the United States gave up on Wednesday evening to challenge California’s net neutrality law, which prohibits them from blocking or regulating traffic according to usage.
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Wall Street sinks into the red, -5% for the Nasdaq!