Market Turbulence: US Indexes Plunge as Treasury Yields Surge to 16-Year Highs
US Indexes Plunge. Thursday, September 21, 2023, was a turbulent day in the US financial markets as all major indexes saw sharp declines. The catalyst for this market upheaval was a surge in Treasury yields to levels not seen in 16 years. Traders, still digesting the Federal Reserve’s recent hawkish tone, became increasingly convinced that elevated interest rates were here to stay.
Market Performance
The Dow Jones Industrial Average closed 370 points lower, reflecting a significant 1.3% drop. The broader S&P 500 sank 1.6%, affecting a wide range of stocks. The tech-heavy Nasdaq composite index experienced a 1.8% decline, reaching a five-week low.
Among the sectors, consumer discretionary and real estate were the hardest hit. Additionally, rate-sensitive tech shares faced pressure as Treasury yields continued to inch higher.
Corporate News
Several prominent companies faced substantial setbacks during this market downturn:
- Amazon saw its stock price drop by 4.4%.
- Broadcom experienced a 2.7% loss following news that Google was contemplating ending their supplier relationship for artificial intelligence chips as early as 2027.
- Cisco slid 3.9% after announcing its acquisition of cybersecurity software company Splunk for $157 per share in a cash deal worth approximately $28 billion.
- KB Home lost 3.4% after the homebuilder anticipated a reduction in its gross housing margin for the current quarter.
Treasury Yields Soar
The most notable catalyst for Thursday’s market turmoil was the surge in Treasury yields:
- The yield on the US 10-year Treasury note jumped by nearly 13 basis points, reaching a staggering 4.5%, a level not seen since October 2007.
- The yield on the 2-year note spiked to almost 5.2%, approaching its highest level since November 2000.
This increase in yields reflected growing trader conviction that interest rates would remain elevated due to the continued strength of the US economy. The Federal Reserve had recently kept interest rates unchanged but signaled the possibility of an additional rate hike later in the year, as well as trimming the expected rate cuts for 2024. Furthermore, the Fed revised its GDP growth forecasts upward for both 2023 and 2024 while anticipating a lower unemployment rate.
In line with this optimistic economic outlook, initial jobless claims dropped to 201,000, marking the lowest level since January and surpassing expectations.
Housing Market Impact
The surge in interest rates had a profound impact on the housing market:
- The average rate on a 30-year fixed mortgage climbed to 7.19%.
- This rate was up 1 basis point from the previous week, nearly approaching the 22-year high of 7.23% observed in August.
- In comparison, the average mortgage rate was 6.29% during the same week the previous year.
High mortgage rates have led to a cooling of housing demand, with homebuilders now feeling the effects. Builder sentiment declined for the first time in several months, and construction levels reached a three-year low, which could further strain an already tight housing supply.
Real Estate and Existing-Home Sales
Existing-home sales in the United States declined by 0.7% in August, reaching an annualized rate of 4.04 million units. This marked the lowest level since January and was attributed to high mortgage rates and house prices. Single-family home sales fell 1.4%, while existing condominium and co-op sales rose 4.8%.
Total housing inventory at the end of August stood at 1.1 million units, down 0.9% from July. Unsold inventory represents a 3.3-month supply at the current sales pace, unchanged from July. The median existing-home price for all housing types increased by 3.9% from August 2022, reaching $407,100.
European Market and Global Impact
European stocks also faced declines on Thursday, driven by concerns in the travel and leisure sectors and mining companies. The Bank of England (BoE) unexpectedly left interest rates unchanged but kept the door open for potential future rate hikes. In contrast, the central banks of Sweden and Norway raised interest rates by 25 basis points. The Swiss National Bank (SNB) unexpectedly halted its monetary policy tightening.
Energy Markets
WTI crude oil prices initially fell due to concerns about higher interest rates potentially dampening demand. However, prices rebounded after Russia announced a ban on fuel exports to stabilize domestic fuel prices. This decision followed a sharp decline in diesel exports from Russia in early September. US crude inventories fell by 2.135 million barrels last week, with stocks at Cushing reaching their lowest levels since July 2022.
Shipping Industry
The Baltic Exchange’s main sea freight index fell by 15 points on Thursday, snapping an 11-session winning streak. This decline impacted various segments, including capesize and panamax indices. The shipping industry’s dynamics are influenced by global trade and can serve as a barometer of economic activity.
Currency Market
In the currency market, the Russian Ruble, Japanese Yen, and Norwegian Krone gained ground, while the Brazilian Real, Swiss Franc, and South Korean Won faced losses. These currency movements are indicative of broader market sentiment and can impact international trade and investment.
Conclusion
Thursday’s market turmoil, driven by surging Treasury yields and concerns about interest rates, has widespread implications for the US economy, including the housing market, corporate performance, and investor sentiment. As global central banks react to economic conditions, financial markets remain highly sensitive to shifts in monetary policy. Investors and analysts will closely monitor economic indicators and central bank decisions for further insights into the future direction of the markets.