Stocks fall, Treasury yields jump as investors face hawkish Fed

U.S. stocks sank lower Monday, extending a sell-off that began last week after hawkish comments by Fed Chair Jerome Powell at the central bank’s gathering in Jackson Hole.

The S&P 500 fell 0.7%, while the Dow Jones Industrial Average shed 180 points, or roughly 0.6%. The tech-heavy Nasdaq Composite again led losses, tumbling another 1%.

Meanwhile in the bond market, the benchmark 10-year Treasury note held above 3.1%, and the 2-year Treasury yield topped 3.4%, hitting its highest level since 2007 earlier in the trading day.

The moves come after Powell reiterated on Friday in Wyoming that the Fed will continue to intervene aggressively to combat inflation, even at the expense of economic growth. The Nasdaq plunged 3.9% following the remarks and the S&P 500 tanked 3.3%, with both indexes logging their biggest one-day drops since June 13 on the heels of Powell’s speech. The Dow erased 1,000 points during the session, or roughly 3%.

“Chair Powell’s speech was a good reminder that 2-year Treasury yields are more important to equity markets than whether the FOMC moves by 50 or 75 basis points at upcoming meetings,” DataTrek’s Nicholas Colas said in a Monday note, pointing out that U.S. large-cap stocks have been sensitive to the 2-year benchmark.

The jump in 2-year yields from 2.28% to 3.45% in mid-June was what cracked equity valuations, with the S&P hitting its June 16th low after yields peaked on June 14th at 3.45%, Colas said. And once 2-year yields leveled out near3%, the S&P 500 rallied 17% through August 16th.

Federal Reserve Chair Jerome Powell walks with Fed Vice Chair Lael Brainard and New York Fed President John Williams during a break at the annual Kansas City Fed Economic Policy Symposium in Jackson Hole, Wyoming, U.S., August 26, 2022. REUTERS/Ann Saphir

The most significant risk to stocks is weakness in earnings, according to Morgan Stanley’s Mike Wilson, who indicated that while the first half of the year was dictated by Federal Reserve policy and tighter financial conditions, the second half will be determined by earnings expectations for next…

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