Wall St drops as jitters over Fed rate hike policy return

By David French

Dec 5 (Reuters) – U.S. markets ended Monday lower, as
investors spooked by better-than-expected data from the services
sector re-evaluated their thinking on the Federal Reserve’s
interest rate policy, while shares of Tesla slid on reports of a
production cut in China.

The electric-vehicle maker slumped on plans to cut
December output of the Model Y at its Shanghai plant by more
than 20% from the previous month.

This weighed on the Nasdaq, where Tesla was one of the
biggest fallers, pulling the tech-heavy index to its second
straight decline.

Broadly, indexes suffered as data showed U.S. services
industry activity unexpectedly picked up in November, with
employment rebounding, offering more evidence of underlying
momentum in the economy.

The data came on the heels of a survey last week that showed
stronger-than-expected job and wage growth in November,
challenging hopes that the Fed might slow the pace and intensity
of its rate hikes amid recent signs of ebbing inflation.

“Today is a bit of a response to Friday, because that jobs
report, showing the economy was not slowing down that much, was
contrary to the message which (Chair Jerome) Powell had
delivered on Wednesday afternoon,” said Bernard Drury, CEO of
Drury Capital, referencing comments made by the head of the
Federal Reserve saying it was time to slow the pace of coming
interest rate hikes.

“We’re back to inflation-fighting mode,” Drury added.

Investors see an 89% chance that the U.S. central bank will
increase interest rates by 50 basis points next week to
4.25%-4.50%, with the rates peaking at 4.984% in May 2023.

The rate-setting Federal Open Market Committee meets on Dec.
13-14, the final meeting in a volatile year, which saw the
central bank attempt to arrest a multi-decade rise in inflation
with record interest rate hikes.

The aggressive policy tightening has also triggered worries
of an economic downturn, with JPMorgan, Citigroup and BlackRock
among those that believe a recession is likely in 2023.

According to preliminary data, the S&P 500
lost 72.87 points, or 1.79%, to end at 3,998.83 points,
while the Nasdaq Composite lost 219.42 points, or 1.93%,
to 11,242.07. The Dow Jones Industrial Average
fell 486.34 points, or 1.41%, to 33,943.54.

In other economic data this week, investors will also
monitor weekly jobless claims, producer prices and the
University of Michigan’s consumer sentiment survey for more
clues on the health of the U.S. economy.

Energy was among the biggest S&P sectoral losers. It
was weighed by U.S. natural gas futures slumping more than 10%
on Monday, as the outlook dimmed due to forecasts for milder
weather and the delayed restart of the Freeport liquefied
natural gas (LNG) export plant.

EQT Corp, one of the largest U.S. natural gas
producers, saw one of the most dramatic falls.

Financials were also hit hard. Although bank profits
are typically boosted by rising interest rates, they are also
sensitive to concerns about bad loans or slowing loan growth
amid an economic downturn.

Meanwhile, apparel maker VF Corp dropped after
announcing the sudden retirement of CEO Steve Rendle. The firm,
which owns names including outdoor wear brand The North Face and
sneaker maker Vans, also cut its full-year sales and profit
forecasts, blaming weaker-than-anticipated consumer demand.
(Reporting by Shubham Batra, Ankika Biswas, Johann M Cherian
and Devik Jain in Bengaluru and David French in New York;
Editing by Anil D’Silva, Shounak Dasgupta and Lisa Shumaker)