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Wall Street reverses gains as hawkish Fed officials douse easing inflation cheer


Traders work on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 5, 2023. REUTERS/Andrew Kelly

Wall Street’s main indexes reversed gains by early afternoon on Wednesday as hawkish comments from Federal Reserve officials sparked worries that the central bank may not be pausing interest rate hikes any time soon.

Markets reacted positively to data, which showed retail sales and producer prices declined more than expected in December.

However, the gains were short-lived as St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester stressed on the need to raise rates beyond 5% to bring inflation to heel.

It also highlighted the disparity between the U.S. central bank’s estimate of its terminal rate and market expectations, which were of the rate peaking at 4.88% by June. Traders are now betting on a 25-basis point rate hike in February.

“Despite the producer prices numbers being okay today, it was just a harsh reminder that we’re a long way from a Fed pivot,” said Dennis Dick, trader at Triple D Trading.

“This market is very hopeful that we’re going to get a soft landing and every time you have hawkish comments from the Fed, it feels you’re not going to get that.”

Focus also remains on the earnings season as it gathers pace to gauge the strength of corporate America against the backdrop of higher interest rates.

Analysts now expect year-over-year earnings from S&P 500 companies to decline 2.6% for the quarter, according to Refinitiv data, compared with a 1.6% decline in the beginning of the year.

U.S. stock markets have started 2023 on a strong footing on hopes that a moderation in inflationary pressures could give the Fed cover to dial down the size of its interest rate hikes.

At 12:27 p.m. ET, the Dow Jones Industrial Average (.DJI) was down 419.97 points, or 1.24%, at 33,490.88, the S&P 500 (.SPX) was down 41.19 points, or 1.03%, at 3,949.78, and the Nasdaq Composite (.IXIC) was down 92.42 points, or 0.83%, at 11,002.70.

The blue-chip Dow was on track for second straight day of losses, while the Nasdaq was set to snap a seven-day winning streak.

Analysts noted that the Dow was positioned for a pullback after having fallen the least among the three major indexes last year.

IBM Corp (IBM.N) was among top drags on the Dow, falling 3.1% after Morgan Stanley downgraded the company’s shares to “equal weight” from “overweight”.

Early gainers Microsoft Corp (MSFT.O) and Tesla Inc (TSLA.O) erased gains by afternoon trading.

Moderna Inc (MRNA.O) rose 2.6% after reporting data which demonstrated the effectiveness of its respiratory syncytial virus (RSV) vaccine.

PNC Financial Services Group Inc (PNC.N) fell 4.9% after the company missed estimates for fourth-quarter profit.

Declining issues outnumbered advancers for a 1.23-to-1 ratio on the NYSE and a 1.53-to-1 ratio on the Nasdaq.

The S&P index recorded nine new 52-week highs and two new lows, while the Nasdaq recorded 63 new highs and 12 new lows.