Stocks fell again. Is the economy too strong?

The stock market fell on Wednesday following still-strong economic data and the start of the Federal Reserve’s “quantitative tightening.”

the Dow Jones Industrial Average  fell 177 points, or 0.5%, while the S&P 500 fell 0.8%, and the Nasdaq Composite decreased 0.7%. Stocks tried to rally in the afternoon but ultimately stumbled to the close.

“US stocks turned negative as expectations grew that the Fed will not ease its rate hike campaign after…strong US economic data,” writes Edward Moya, senior market analyst at Oanda.

The declines come even after all three major indices finished in the red on Tuesday, amid concerns that The new plans of the European Union for restrictions on Russian oil would cause oil prices to rise significantly. On Wednesday, WTI Crude Oil rose to $114 a barrel, and is up more than 12% in the past month.

Now, markets are poring over various economic data, which may have implications for inflation and the Fed’s plans to raise interest rates.

The latest was the manufacturing index from the Institute for Supply Management. It came in at 56.1 in May, up from 55.4 in April, and any reading above 50 represents growth in activity. New orders grew, suggesting that manufacturers expect strong demand even as interest rates rise, writes Citigroup economist Andrew Hollenhorst.

The hot manufacturing number could easily foreshadow that inflation will remain quite high and that, in turn, could mean that the Fed is sticking with its plan to raise interest rates much faster than it normally has in the past few years. last years.

On the employment front, job openings remained near record levels in April, with 11.4 million job openings, the Labor Department reported Wednesday. Recently, there have been about 1.9 job openings for every unemployed person, according to 22V Research. That’s the kind of dynamic markets they want to see disappear. Companies, eager to hire, have to pay higher wages, forcing them to raise prices, which contributes to general inflation.

The bond market did not take both data very seriously. The 2-year Treasury yield, which attempts to forecast the level of the fed funds rate a couple of years from now, rose to 2.66%, a level it hasn’t reached in a couple of weeks.

There is more data to come. Jobless claims are due Thursday, and then the May jobs report will be released on Friday. Economists expect 328,000 jobs to be added, which would be down from the 428,000 jobs added in April. Markets want to see a solid jobs number, which indicates a strong economy, but not too strong, which would be a sign that the Fed still needs to do more to slow the economy and fight inflation. A number well above expectations could also point to still high inflation as more people would be earning and spending.

That has been a focal point for the market recently. The latest inflation data showed that the rate of price increase has slowed, to the delight of the stock market, as this indicates that the The Fed could soon slow the pace of interest rate hikes. Now the markets, and the Federal Reserve, need to see continued evidence that inflation will not remain too high.

That evidence hasn’t surfaced this week, and the market could be bracing for some negative news on that front, as stocks have rallied in recent weeks. The S&P 500 is up 8% from its intraday low for the year, hit on May 20.

“May is finally over, but concerns about inflation, war and high energy prices welcome the new month with us,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

In keeping with high inflation, the Fed begins shrinking its balance sheet today. In a process called quantitative tightening, the Fed will not reinvest fixed amounts of interest income in the bond market. Investing less money in bonds lowers their prices and raises their yields, making them more attractive to investors. The 10-year Treasury yield has already risen to 2.93%, from 1.51% at the end of 2021, which has partly contributed to the decline in stocks this year.

The good news: The bond market may have already reflected the Fed’s balance sheet reduction. “It may well be that the worst of the sell-off and bond market volatility [of] rate expectations are already behind us,” writes Jonas Goltermann, senior economist at Capital Economics.

Still, no one knows whether reduced demand for bonds from the implementation of the balance sheet reduction will cause the 10-year yield to soar again. That would be a problem for the stock market.

“The elephant in the room is that today the Fed begins to shrink its $9 trillion balance sheet, something the market has very little experience with,” writes Louis Navellier, founder of Navellier & Associates.

Abroad, the pan-European Stoxx 600 fell 1%, and Hong Kong’s Hang Seng Index lost 0.6%.

Here are five stocks in motion on Wednesday:

Sales force (ticker: CRM) shares soared 9.9% after the business software company raised forecasts for adjusted earnings for the fiscal year.

The company reported a profit of 98 cents per share, beating estimates of 94 cents per share, on sales of $7.41 billion, above expectations of $7.38 billion. The company targeted full-year EPS of $4.75 at the midpoint of its range, signaling that its operating margin will grow as it controls costs even as sales rise. This was good news for a stock that had already been beaten during the year. “

Sales force

delivered a much better than feared April quarter and guidance that will be a huge relief to tech investors,” wrote Dan Ives, an analyst at Wedbush Securities.

Capri Holdings

(CPRI) shares rose 1% after the company reported a profit of $1.02 per share, beating estimates of 82 cents per share, on sales of $1.49 billion, above expectations of $1.41 billion. The company announced a new $1 billion share buyback program.

victoria’s secret

(VSCO) shares jumped 9.5% after the company reported a gain of $1.11 per share, beating estimates of 84 cents per share, on sales of $1.48 billion, in line with expectations.

amazon.com

(AMZN) rose 1.2% after JPMorgan called the stock its best e-commerce idea.

Park Hotels and Resorts

(PK) shares gained 3% after updating to Buy from Hold on Truist.