US stock and government bond prices fell on Wednesday, putting the brakes on a brief rally that had been fuelled by bargain-hunting investors and hopes that weak economic data could slow the pace of monetary policy tightening by central banks.
The broad S&P 500 index fell as much as 1.8 per cent on Wednesday morning, but recovered the bulk of its losses to close the day 0.2 per cent lower. The tech-heavy Nasdaq Composite slipped 0.3 per cent. European stocks also fell, with the continent-wide Stoxx 600 dropping 1 per cent.
The bumpy day contrasted with strong gains at the start of the week, with the S&P 500 enjoying its largest two-day rally since the depths of the coronavirus pandemic in spring 2020 as some analysts and investors identified bargain opportunities after three straight quarters of losses.
The gains had picked up following the release of weaker than expected US labour market data on Tuesday that showed the number of job vacancies in the world’s largest economy dropped in August to 10.1mn, below economists’ forecasts of 10.8mn and the previous month’s figure of 11.2mn.
Jobs reports have been closely watched as an indicator of how far and fast the US Federal Reserve will tighten monetary policy to curb inflation, with stronger data driving expectations of more aggressive action and weaker numbers soothing concerns over the scale of future rate rises.
The figures on Tuesday were “the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in [labour] demand”, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Concerns have intensified in recent months that the Fed and its peers will increase borrowing costs to such an extent that they compound an economic slowdown.
But even as signs of a cooling jobs market eased expectations of rate increases, Hani Redha, global multi-asset portfolio manager at PineBridge Investments, warned: “The scale of tightening means we will see ongoing deceleration that is quite likely to take us into a recession anyway.”
Redha said equity market gains in the past couple of days could be a “bear market rally”, when shares recover briefly during a longer period of decline.
“As a bear market progresses, the rallies get bigger,” he added. “It takes more and more volatility to . . . wash out the long positions [before a more sustainable recovery begins].”
In debt markets, the yield on the 10-year US Treasury note added 0.14 percentage points to 3.75 per cent as its price dropped sharply. UK bonds also came under pressure, with the equivalent gilt yield rising 0.16 percentage points to 4.01 per cent.
Gilts had convulsed last week in response to Westminster’s mini-Budget as investors took fright from new chancellor Kwasi Kwarteng’s proposed tax cuts and extensive borrowing plans. Selling pressures eased only when the Bank of England intervened last Wednesday to calm the turbulence, pledging to buy long-dated bonds.
The dollar, which had fallen back in recent days on hopes US borrowing costs would ease, added 1 per cent against a basket of six currencies.
The pound weakened 1.3 per cent to trade at $1.133, following UK prime minister Liz Truss’s Conservative party conference speech, in which she sought to reassure markets by stating her commitment to fiscal discipline.
Asian stocks followed Tuesday’s moves in the US with strong gains overnight. The Hang Seng index rose 5.9 per cent as it reopened after a public holiday.