S&P 500, NASDAQ Composite Tumble Nearly 1% on Fed Tightening Fears

The S&P 500 Index and the NASDAQ Composite are trading sharply lower after a stronger-than-expected ISM Services PMI report fueled expectations the Federal Reserve would maintain its path of interest rate hikes to combat inflation. The report showed that ISM Non-Manufacturing PMI in November rose to 56.5, beating the 53.5 forecast and 54.4 previous reading.

At 15:23 GMT, the benchmark S&P 500 Index is trading 4028.07, down 43.63 or -1.07% and the tech-heavy NASDAQ Composite is at 11327.32, down 134.18 or -1.17%. The blue chip Dow Jones Industrial Average is trading 34142.54, down 287.34 or -0.83%.

Stocks were trading lower shortly before the opening on fears the Federal Reserve may continue tightening until it steers the economy into a recession. Today’s ISM Services PMI report validates that argument.

Strong Economic Data Capping Gains on Worries Fed May Have to Remain Aggressive

Friday’s U.S Non-Farm Payrolls report combined with today’s PMI data is adding to the market’s Fed anxiety. The number of jobs added surged in November, average hourly earnings rose more than twice the forecast and today’s data was well above expectations.

All these factors point toward higher inflation which could give the Federal Reserve the greenlight to increase the level of its “terminal rate”, or the point where the Fed stops raising rates.

Following a speech last week by Fed Chairman Jerome Powell, traders largely expect the central bank will approve a 0.5 percentage point interest rate increase.

However, Powell also said the terminal rate likely “will need to be somewhat higher” than indicated at the September meeting. That could mean a fed funds rate that ends up in excess of 5%, from its current target range of 3.75%-4%. This concern is weighing on the stock market on Monday.

Tesla Weakness Drags NASDAQ Composite Lower

Tesla shares are down more than 4% on news that the electric vehicle giant is reportedly planning to cut output for its Model Y by more than 20% in December at its plant in Shanghai.

News of the planned cut, first reported by Bloomberg, cited sources familiar with the matter.

Short-Term Outlook

We’re expecting heightened volatility from now until the Fed makes its interest rate decision on Dec. 14. This includes the U.S. Consumer Price Index on Dec. 13. Given the strength in the November Non-Farm Payrolls and ISM Services PMI reports, traders are bracing for the possibility of another surge in inflation.

Given this possibility, we’re likely to see a choppy, two-sided trade rather than a trending market during the time leading up to the Fed announcements.