S&P 500 drops sharply as risk aversion sinks in ahead of US NFP

Wall Street maintains a downbeat mode late in the New York session, with US equities registering substantial losses. Sentiment shifted sour, with traders expecting additional labor market data and next week’s inflationary figures as the Federal Reserve (Fed) prepares for the upcoming meeting.

At the time of writing, the S&P 500 is falling 1.43%, at 3,925.50. Following suit is the heavy-tech Nasdaq 100, down 1.58% at 11,390.53, while the Dow Jones drops 1.31%, at 32,367.39.

US equity indices, the US Dollar, and UST bond yields are down, ahead of US NFP

On Tuesday, Jerome Powell began his two-day testimony before the US Senate and the House of Representatives. Powell said that the Federal Funds Rate (FFR) would peak higher than estimates, and if upcoming data warranted a larger hike, the Fed has the tools to do it. When asked about the March 21-22 meeting, he said, “We have not made any decision,” leaving the door open for a 50 or 25 bps lift.

Powell’s words rattled the financial markets, with the S&P 500 plunging from around 4,056.90 to 3,927.00 for a 3.22% fall. The greenback advanced, as shown by the US Dollar Index, which went up 1.50% and printed a weekly high of 105.883. US Treasury bond yields skyrocketed, with 2s and 10s peaking at 5.084% and 4.019%, respectively. Consequently, the US bond yield curve inverted the most since the 1980s, at over 100 bps. The US 2s-10s yield curve has functioned as a forecast indicator of recessions within a 12-month period.

Thursday’s data in the US economic docket cooled down expectations of a 50 bps hike, with unemployment claims rising above estimates. Traders’ focus is on Friday’s US Nonfarm Payrolls report and next week’s US Consumer Price Index.

An upbeat labor market data and higher inflation could reinforce the Fed’s hawkish shift of late. Otherwise, it could pave the way for 25 bps increases. The CME FedWatch Tool has fully priced in a 25 bps rate increase, and odds for a 50 bps lie at 62.4%.

US President Joe Biden filled his budget for the 2024 fiscal year, which includes a plan to cut $3 trillion from the deficit over the next decade. Some of the highlights are:

• Taxes on wealthy people and large corporations.
• Increase of corporate tax rate to 28%.
• Hiking taxes on oil and gas companies.

Of late, Bitcoin is plummeting 4.52%, at 20,705 a coin, in what appears to be traders squaring off positions ahead of volatile US economic data.

S&P 500 Daily chart