The stock surge that followed the Federal Reserve decision proved short lived ahead of Friday’s jobs report, with traders worried that officials could struggle to fight inflation amid the threat of a recession.

Just a day after notching the biggest rally in two years, the S&P 500 tumbled, with more than 95 per cent of its companies moving lower. The Nasdaq 100 suffered one of its sharpest U-turns ever. The tech benchmark plunged about 5 per cent, wiping out its post-Fed gains. A selloff in long-end Treasuries pushed the 10-year yield above 3 per cent. The dollar climbed.

Doubts that policy makers can arrest runaway prices rocked markets, with the prospect of stagflation unsettling investors. By pushing back on a jumbo-hike of 75 basis points in June, Fed Chair Jerome Powell beat back traders’ most-aggressive predictions. However, it’s still a bumpy road ahead, with pivotal economic data and global developments that could seed doubts about the central bank’s approach. Friday’s jobs reading is expected to show solid payroll growth and wages holding at exceptionally high levels -- remaining an enduring source of inflationary pressures. 

Comments:

• “I expected some selloff, but the great puking that’s happening, I didn’t expect,” said Kim Forrest, founder and chief investment officer at Bokeh Capital Partners. “Is this capitulation? I remember what capitulation feels like -- this kind of feels like capitulation, when everything, even the good names, are getting barfed out.”
• “It’s going to be incredibly difficult for the Fed to normalize interest rates without having a negative impact on growth and earnings,” said Paul Nolte, portfolio manager at Kingsview Investment Management. “So stock prices are too high if we’re going to see a flattening or a decline in earnings per share.”
• “Make no mistake, the Fed is in the early stages of what we believe will be a very aggressive tightening cycle,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman.

The swing higher in longer-dated yields certainly matters for the broader economic picture as they influence borrowing costs. Mortgage rates in the U.S. resumed their upward jump, reaching the highest level since August 2009. Separate data Thursday showed that productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labor costs surged and illustrated an extremely tight job market.

Corporate Highlights:

• Shares of e-commerce companies from Etsy Inc. to Shopify Inc. tumbled after weaker-than-expected quarterly earnings and forecasts deepened concern that the pace of online shopping has slowed.
• EBay Inc. gave a lackluster sales and profit outlook for the current quarter, accelerating its decline from the peaks reached when shoppers were stuck at home during the pandemic.
• Elon Musk has secured about US$7.1 billion of new financing commitments, including from billionaire Larry Ellison, a Saudi Prince, and Sequoia Capital, to help fund his proposed US$44 billion takeover of Twitter Inc.

Elsewhere, the pound slumped as investors looked past the Bank of England’s rate increase and turned their focus on forecasts for a recession in 2023. BOE Governor Andrew Bailey said the U.K. economy is already slowing because of a squeeze on consumer spending power, and that will help reduce inflation next year.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 3.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 5.1 per cent
• The Dow Jones Industrial Average fell 3.1 per cent
• The MSCI World index fell 2.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.9 per cent
• The euro fell 0.7 per cent to US$1.0550
• The British pound fell 2.1 per cent to US$1.2365
• The Japanese yen fell 0.7 per cent to 130.03 per dollar

Bonds

• The yield on 10-year Treasuries advanced 11 basis points to 3.04 per cent
• Germany’s 10-year yield advanced seven basis points to 1.04 per cent
• Britain’s 10-year yield was little changed at 1.96 per cent

Commodities

• West Texas Intermediate crude rose 0.4 per cent to US$108.26 a barrel
• Gold futures rose 0.5 per cent to US$1,878.60 an ounce