Strategic observation

News Analysis: Experts warn of economic slowdown after U.S. equities plunge

2018-12-05 16:04:10 (Beijing Time)         English.news.cn

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NEW YORK, Dec. 4 (Xinhua) -- Signs of an economic slowdown jittered the U.S. equities market on Tuesday, and volatility may continue before the situation eases, experts have said.

All three major indices erased more than 3 percent at the close. The Dow Jones Industrial Average fell nearly 800 points, or 3.1 percent, posting its worst day since Oct. 10. The S&P 500 lost 3.2 percent, falling below its 200-day moving average. The Nasdaq Composite declined 3.8 percent to drop back into correction territory.

The Cboe Volatility index, widely considered the best fear gauge in the stock market, rose 26.16 percent to 20.74 on Tuesday.

The U.S. three-year treasury note yield stood at 2.808 percent, higher than the five-year note on Tuesday. The inverted yield curve caught investors' attention, because historical statistics show that when short-term yields trade above longer-term rates, a recession could follow.

Fears of a possible economic slowdown were also spurred by weaker-than-expected quarterly guidance from Toll Brothers.

The U.S. leading home construction company reported its first fall in quarterly orders in more than four years, hit by rising interest rates and higher home prices.

The company's results are the latest evidence of slowing housing demand, after years of steady recovery following the housing crash a decade ago.

The U.S. Census data showed new home sales have declined for 11 straight months.

According to BofA Merrill Lynch Global Research, which on Tuesday issued its outlook for the global markets and economy in 2019, the housing market is no longer a tailwind for the U.S. economy. The bank said housing sales have peaked and home price appreciation is forecast to slow.

The outlook forecast that real U.S. GDP growth will reach 2.7 percent in 2019, slowing in the second half of the year as the effects of fiscal stimulus begin to fade.

Apart from the inverted yield curve, the adjustment made to inflations because of much lower oil prices as well as less of a need to raise interest rates in the United States all sent signals to some that the economy may be slowing, said John Monaco, a trader at Wellington Shields & Co. LLC.

"From a trading perspective, it just means there's a lot of confusion, and there's no clarity. That's the least thing market wants," said Matthew Cheslock, a trader at Virtu Americas LLC.

He noted that with the uncertainties, there were only sellers and no buyers because "people are afraid to get back in right now."

Analysts said given the market concern over economic growth trajectory, Federal Reserve's next move will be under the limelight.

While market has already priced in the December rate hike, investors will be looking for evidence in Fed officials' next remarks to see if the economy does go into recession due to the inverted yield curve, if the Fed cut rates quickly again and if rate adjustments materially impact the market.

Federal Reserve Vice Chairman for Supervision Randal Quarles said on Monday that interest rates are approaching neutral, but the concept of a neutral rate can be less useful after the economic conditions become more normal.

Fed officials estimate the neutral rate of interest is from 2.5 to 3.5 percent, according to Quarles.

Asked whether rate hikes would end sooner rather than later, Quarles said it was not clear about exactly how much further interest rates would rise.

"Where we will end up in that range will depend on the data we receive and our assessment of the performance of the economy over the course of next year," he noted.

Neutral interest rate, a notion that is driving the Federal Reserve's attitude towards the normalization of U.S. monetary policy, means a level neither stimulative nor restrictive to the economy.

Market expectations for a Fed rate hike in December stood at 78.4 percent, according to the CME Group's FedWatch tool. While Fed officials saw three rate hikes next year, the markets just have one hike priced in.