Bank of Japan’s Decision to Raise Yields Triggers Stock Market Decline in the US
US stocks closed lower on Thursday following news of the Bank of Japan’s plan to allow long-term interest rates to rise. This move caused US yields to increase, thus putting an end to the Dow’s longest winning streak since 1987.
According to reports from the Nikkei newspaper, Japan’s central bank will maintain the 0.5% cap for the 10-year government bond yield but is considering allowing long-term interest rates to surpass that level by a certain degree. While Reuters confirmed that the central bank might make minor adjustments to extend the lifespan of its yield control policy.
Michael Green, the chief investment strategist at Simplify Asset Management, stated that news of the Bank of Japan’s plans had the most significant impact on Wall Street’s performance on Thursday. The higher interest rates in Japan pushed the US 10-year yield above 4%, making stocks less appealing to investors.
Preliminary data shows that the S&P 500 lost 28.93 points, or 0.63%, closing at 4,537.82 points. The Nasdaq Composite also experienced a decline of 76.42 points, or 0.54%, ending at 14,050.86. Meanwhile, the Dow Jones Industrial Average fell 233.73 points, or 0.66%, settling at 35,286.39.
Despite the overall decline in the market, Meta (formerly Facebook) reported a significant increase in second-quarter advertising revenue, surpassing financial expectations. However, Microsoft experienced a decline as it announced an aggressive spending plan to meet the demand for its new artificial intelligence-powered services.
Megacap growth stocks have greatly contributed to the Nasdaq’s dominance on Wall Street this year, with the index rising approximately 34%.
On Wednesday, the Federal Reserve announced a 25 basis points interest rate hike as expected. Traders now only see a 20% chance of a surprise quarter-point increase in September.
Fed Chair Jerome Powell stated on Wednesday that the Fed staff no longer predicts a US recession but did not rule out another rate hike, mentioning that the Fed would be guided by future economic data.
Additionally, a Commerce Department report released on Thursday revealed that the US economy grew faster than expected in the most recent quarter.
Kim Rupert, the managing director of global fixed income at Action Economics in San Francisco, highlighted that the strong economic data earlier in the day prompted the market to reassess its positioning after the Federal Reserve slightly upgraded its growth outlook on Wednesday.
Rupert expects a Fed rate hike in September, considering the increased potential for another one that had been previously priced out by the markets.
Meanwhile, eBay’s third-quarter profit forecast fell below market expectations as the e-commerce platform increased spending to strengthen categories such as auto parts, refurbished goods, and collectibles. As a result, eBay’s shares declined.
However, chipmakers such as Nvidia and Micron experienced gains after Lam Research projected upbeat quarterly sales. Shares of Lam Research also rose.
Southwest Airlines witnessed a decline after reporting a dip in second-quarter profit. Conversely, Royal Caribbean saw a surge in its stock price after the cruise operator raised its annual profit forecast.
On another note, the European Central Bank raised interest rates for the ninth consecutive time and kept the possibility of further tightening open.
Overall, the Bank of Japan’s decision to raise yields created a ripple effect felt in the US stock market. As investors reevaluate their positions and react to various economic reports, the market experienced a decline. The upcoming months will be crucial as analysts anticipate a potential rate hike by the Federal Reserve in September.
