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Wall Street records its worst day of 2023 on fears that interest rates will rise for longer

By David French

(Reuters) – Wall Street posted its worst performance of the year on Tuesday, with major benchmarks slipping as investors interpreted a rebound in US business activity in February as interest rates need to stay higher longer to control inflation.

It was the third consecutive session for the S&P 500 and Nasdaq Composite to close lower, while the Dow Jones Industrial’s decline wiped out its gains for 2023.

The declines came after the S&P Global Purchasing Manufacturer’s Index, which tracks business activity in the United States, expanded in February for the first time in eight months. A reading of 50.2 versus 46.8 in January was supported by a resilient services sector, according to a survey.

The report added a raft of economic data that painted a picture of a resilient economy continuing to perform amid multiple central bank rate hikes in 2022 aimed at curbing inflation.

With inflation still a long way from the Fed’s 2% target and the economy retaining much of its strength, money market participants have revised upwards where they see Fed fund rates peaking – currently at 5.35% in July and remain at this level throughout the year .

“The realization today is that the Fed is no longer joking about higher readings, and in fact it could be a little bit higher for a little to a lot longer,” said Carol Schleif, chief investment officer at BMO Familienb├╝ro.

US stocks started the year on an upbeat note after their worst annual result in more than a decade in 2022, as investors hoped the central bank’s rate-hiking cycle was nearing its end. However, this positive attitude leaves equity markets vulnerable to pullbacks when the data undermines such expectations.

“The market continues to look for a dovish pivot and they just won’t get it,” said Schleif.

Investors will look to the minutes, which detail the discussion at the Fed’s latest monetary policy meeting, taking place on Wednesday, for further clues about the central bank’s stance on interest rates.

The Dow Jones Industrial Average fell 697.1 points, or 2.06%, to 33,129.59, the S&P 500 lost 81.75 points, or 2.00%, to 3,997.34, and the Nasdaq Composite fell 294.97 points, or 2 .5% to 11,492.30.

Big tech stocks were among those hit by Tuesday’s widespread declines, with Tesla Inc, Amazon.com Inc, Microsoft Corp and Google parent Alphabet Inc all falling between 2.1% and 5.3%.

Unhelpful was the fact that the benchmark 10-year US Treasury bond hit a fresh three-month high. [US/]

Higher yields typically weigh on growth stocks, whose valuations are typically based on future earnings that are heavily discounted as interest rates rise.

The semiconductor index was also affected, falling 3.3%.

Elsewhere, Home Depot Inc slumped 7.1% to a three-month low after the No. 1 domestic hardware store chain warned of slowing demand and issued a somber 2023 earnings forecast.

Smaller competitor Lowe’s Cos Inc fell 5.1% ahead of its results next week.

Walmart forecast full-year earnings below estimates and painted a bleak picture of higher-than-expected food inflation that squeezed profit margins. However, the world’s largest retailer rose 0.6%.

All 11 major S&P 500 sectors fell, with the 3.3% decline in the consumer discretionary index taking the lead.

Volume on US exchanges was 11 billion shares compared to the average of 11.62 billion for the entire session over the past 20 trading days.

The S&P 500 posted two new 52-week highs and a new low; the Nasdaq Composite posted 57 new highs and 112 new lows.

(Reporting by Johann M Cherian and Medha Singh in Bengaluru and David French in New York; Editing by Marguerita Choy and Anil D’Silva)

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