By Yasin Ebrahim
Investing.com -- The Dow slumped below a key milestone Thursday, erasing the gains from a day earlier as investors appear to be second-guessing the Federal Reserve’s ability to avoid a recession amid expectations for red-hot inflation to persist.
The Dow Jones Industrial Average slipped 2.6%, or 808 points to fall below 30,000 and the Nasdaq fell 4.2%, and the S&P 500 fell 3.5%.
Investors appear to be bracing for the Fed to turn even more hawkish -- following its 75 basis rate hike – on bets that inflation will remain elevated for longer than the Fed currently expects.
“Bottom line is the Fed still believes core inflation is largely temporary,” {{Morgan Stanley}} said, pointing to the Fed’s forecast for core inflation to peak at 4.3% this year, and eventually drop to under 3% next year.
But with inflation currently running at 8.6% and expected by traders of “fixings,” or derivative-like instruments to remain above 8% for the year, the Fed may be forced to hike rates to a terminal rate, or peak of 4.5% to 5%, more than the central bank’s current forecast of 3.5% to 4%.
Despite the slip in Treasury yields post-Fed decision, {{Morgan Stanley}} said it believes that yield curve will soon resume flattening and invert – a key recession warning - as the markets “move toward a higher terminal rate.”
Tech and consumer discretionary, the growth areas of the market, gave back their gains from a day earlier, with latter led by slump in consumer stocks on worries about Fed-induced slowdown pushing the economy into recession.
Royal Caribbean Cruises (NYSE:RCL), Norwegian Cruise Line (NYSE:NCLH), Carnival Corporation (NYSE:CCL) were among the biggest decliners, while Tesla (NASDAQ:TSLA) slumped 10% to pile on the pressure in the sector.
Big tech, meanwhile, was also shunned, with Facebook (NASDAQ:META), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) down more than 4%.
KLA-Tencor Corporation (NASDAQ:KLAC) sidestepped the broader selloff in chip stocks, meanwhile, after reiterating its guidance for the current quarter, and detailing a new $6 billion stock buyback programme.
Economic data on Wednesday exacerbated fears of the slowdown. The housing market continue to run out of steam as data showed housing starts, measure of U.S. homebuilding, fell to a 13-month low as mortgage rates climbed.
Homebuilder stocks were quick to react to the data. Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN), PulteGroup (NYSE:PHM), fell more than 7%.
With the Fed’s balance reduction plan underway, which “includes [selling] mortgage-backed securities,” […] housing remains the proverbial canary in the coal mine; its song is getting softer,” Yelena Maleyev, economist at Grant Thornton said in a note.