US equities ticked lower on Tuesday after a drop in the previous day, when traders took hotter than expected US services data as a signal for further interest rate rises from the Federal Reserve.
The S&P 500 index slipped 0.3 per cent in early trading, with the Nasdaq Composite down 0.4 per cent. Both benchmarks on Monday endured their largest daily declines since early November following a report from the Institute for Supply Management showing that its index, which tracks economic activity in the services sector, expanded for the 30th month in a row in November, rising to 56.5 from 54.4 in October.
The unexpectedly strong figure was interpreted by investors as a sign that the Fed may yet have to keep the world’s most important interest rate higher for longer in an attempt to cool the US economy. A cycle of rate rises has increased the federal funds rate to a target range of 3.75 per cent to 4 per cent from zero at the start of the year.
“The latest ISM data underline the divergences evident in the US economy as spending continues to shift from goods to services,” said Mark Haefele, global chief investment officer for UBS’s wealth management group, pointing to November’s contraction in the US manufacturing sector.
“While inflation has likely peaked, price pressures in the services sector are proving slow to abate,” Haefele added, noting that “good economic news” lowered the chances of a so-called Fed pivot around inflation expectations.
Fed chair Jay Powell said in a speech last week that although price growth showed signs of cooling in October, “by any standard, inflation remains much too high”. Trading in futures markets shows investors expect US interest rates to peak at about 5 per cent in spring next year before falling slowly toward the end of 2023. US central bankers are set to meet next week for the last Federal Open Market Committee meeting of 2022, with the European Central Bank and Bank of England also set to make policy decisions.
US government bonds gained in price on Tuesday after selling off sharply following the ISM release. The yield on the interest rate-sensitive two-year Treasury fell 0.02 percentage points to 4.37 per cent. The yield on the benchmark 10-year note lost 0.03 percentage points at 3.57 per cent. Yields fall as prices rise.
Short-term debt yielding more than long-term debt tends to indicate an impending recession, and Julian Howard, lead investment director at GAM, said the Treasury market was “correctly hinting that the [US] economy is going to get really, really hit”.
In Asia, meanwhile, Hong Kong’s Hang Seng index shed 0.4 per cent, although the index has rallied more than 17 per cent since its late October low. China’s CSI index of Shanghai- and Shenzhen-listed stocks gained 0.5 per cent as zero-Covid policies were eased across the country.
In commodity markets, the price of Brent crude, the international benchmark, fell 0.4 per cent to $82.39 a barrel.