Tech leads US stocks lower after Powell says Fed has more to do on rates

Wall Street stocks dropped on Wednesday, with tech leading the decline, as investors grew cautious after US Federal Reserve chair Jay Powell warned interest rates would need to rise to bring inflation back to target.

The S&P 500 fell 0.5 per cent and the tech-heavy Nasdaq Composite lost 1.2 per cent. Both indices recorded their third successive session of losses. Tech stocks were hit particularly hard as higher rates reduce the appeal of companies that promise long-term growth.

The recent rally in blue-chip stocks, which pushed Wall Street’s benchmark indices to their highest levels in more than a year, has stalled as investors doubted whether the central bank would soon stop raising interest rates.

In his semi-annual testimony before the House of Representatives financial services committee on Wednesday, Powell said the tightening campaign still had “a long way to go” before the economy slowed sufficiently to bring inflation back to the 2 per cent target.

The Fed kept the benchmark federal funds rate steady last week, at a target range of between 5 per cent and 5.25 per cent, but signalled that two additional rate increases were likely later in the year. Powell on Wednesday said the increases signalled by the dot plot were “a pretty good guess of what will happen” if the economy evolved as expected.

Traders have priced in a 72 per cent probability that the Fed will go ahead with another quarter-point increase at the next policy meeting in July, according to data compiled by Refinitiv and based on interest rate derivatives prices.

In Europe, the region-wide Stoxx 600 and France’s CAC 40 ended the day 0.5 per cent lower, while Germany’s Dax lost 0.6 per cent.

The moves came after official data in the UK showed the annual rate of consumer price inflation remained at 8.7 per cent in May, well above analysts’ expectations of 8.4 per cent, reinforcing investors’ view that the Bank of England is far from the end of its tightening cycle.

Core inflation, which excludes volatile food and energy prices, rose again to 7.1 per cent in May, from 6.8 per cent in the previous month.

Futures markets indicated a slightly more than 50 per cent probability that the BoE will increase interest rates by 0.25 percentage points from 4.5 per cent on Thursday, but the odds of a larger half-point rise also climbed.

“I don’t think [inflation] is high enough to materially increase the chances of a 50 basis point increase tomorrow but it certainly raises the risks that we get hikes beyond 5 per cent in August,” said Imogen Bachra, head of UK rates strategy at NatWest.

Yields on two-year gilts, which are sensitive to interest rate changes, rose 0.1 percentage points to 5.02 per cent, while the yield on the benchmark 10-year rose 0.07 percentage points to 4.4 per cent. Bond yields rise as prices fall.

London’s FTSE fell 0.1 per cent, dragged lower by real estate stocks, as “rising interest rate expectations have pushed up monthly mortgage payments, which will contribute to a slowdown in trading activity and house prices this year”, said Tom Bill, head of UK residential research at Knight Frank.