Why did the inventory market fall immediately? Fed dropped indications of inflationary measures

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All three major US indices came back from deep morning losses as investors awaited a sign from the Fed on how to deal with rising inflation. The central bank did not disappoint.

Shares ended the day modestly as the Federal Reserve, in minutes of its last meeting, confirmed expectations that it would consider taking action to fight high inflation.

The

Dow Jones industry average

fell 164.62 points, or 0.48%, to close at 33,896.04. The

S&P 500

lost 12.15 points, or 0.29%, to end at 4,115.68 and the

Nasdaq Composite

slipped 3.9 points, or 0.03%, to close at 13,299.74. The biggest win in the S&P 500 was

Take-Two Interactive Software

(Ticker: TTWO), which saw stocks rise 7% after the video game company beat earnings estimates.

When the inflation data arrived, investors expected the Fed to consider scaling back the size of its asset purchase program. Inflation, which has already exceeded expectations in the US, rose faster than expected in the UK. There the input component of the producer price index rose by 9.9% in April compared to the previous year, which corresponds to an estimate of 4.4%. But the three major US indices were able to reduce deep morning losses by the end of the day.

“We expect the stock market to remain volatile in the months ahead as the market seeks clarity on inflation,” wrote Richard Saperstein, chief investment officer of Treasury Partners, in a press release prior to the Fed’s disclosure Email has been sent.

Punctually, the Fed said it might consider rejuvenating or cutting its asset purchase program.

“It may be appropriate to begin discussing a plan to adjust the pace of asset purchases at some point in the upcoming meetings,” the minutes read. Less money going into the bond market would lower bond prices and increase their yields. The 10-year government bond yield ended the day at 1.68%, down from 1.66% just before the Fed’s release and down 1.62% at the start of the day. Higher bond yields hurt the value of future cash flows and put pressure on stock valuations.

Investors have recently been grappling with “uncertainty about how long the Fed can maintain its policy stance,” Alicia Levine, chief strategist at BNY Mellon Investment Management, told Barron’s.

Growth stocks, including technology and biotechnology, have been sold on rejuvenation rumors in the past few weeks, and investors bought growth on the breaking news today. In the meantime, everything else was sold out as higher interest rates also hit mature companies in their top profit, represented by value stocks. Loaded with stocks like this, the Dow saw only five components ending the day in gains, and the top three winners were some of the toughest tech names:

Salesforce.com

(CRM);

Microsoft

(MSFT); and

Intel

(INTC).

Keep watching bond yields.

Write to Jacob Sonenshine at [email protected]

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