Stephen Chernin
Wall Street’s major averages lost ground on Wednesday, amid a flurry of major headlines.
The U.S. Treasury said it would increase the size of its debt sales, a day after Fitch in a surprise move downgraded the country’s top-tier debt rating. Moreover, a measure of private payrolls came in much higher than expected, pointing to continued resilience in the labor market.
The tech-heavy Nasdaq Composite (COMP.IND) slumped 2.17% to end at 13,973.45 points. The benchmark S&P 500 (SP500) slipped 1.38% to close at 4,513.45 points, while the blue-chip Dow (DJI) retreated 0.98% to settle at 35,282.89 points.
Of the 11 S&P sectors, nine ended trading in the red. Growth sectors Technology, Communication Services and Consumer Discretionary were the three biggest losers. Defensive sectors Consumer Staples and Health Care were the two gainers.
‘Debt’ was the word of the day, after Fitch blindsided markets on Monday by downgrading the United States’ long-term rating to AA+ from AAA, following in the footsteps of S&P Global Ratings back in 2011. Fitch cited expected fiscal deterioration, a growing debt burden, and the erosion of governance related to its peers. The downgrade comes just months after President Joe Biden’s administration avoided a historic default.
“(Fitch) even went so far as to predict that the nation will enter into a mild recession in either the final quarter of this year or the first quarter of next year. It is worth noting that JPMorgan Chase (JPM) CEO Jamie Dimon referred to the (rating downgrade) decision as ‘ridiculous’ and noted that, while we could see a recession, the overall economy looks alright,” Daniel Jones, investing group leader of Crude Value Insights, told Seeking Alpha.
The negative reaction from markets on Wednesday was also fueled by moves from the U.S. Treasury. On Monday, the federal department announced a larger than expected borrowing estimate for the rest of the year. On Wednesday, it increased the size of its quarterly sales of longer-term debt for the first time in more than two and a half years.
“The U.S. Treasury announced that it was increasing debt sales for longer dated securities, effectively locking in higher interest rates that the government will have to pay,” Jones said.
Meanwhile, Treasury yields have seen a tumultuous session. They initially fell as traders moved out of stocks and fled to the safety of bonds following the Fitch downgrade. Bonds have since sold-off, pushing yields higher, after ADP’s July reading of private sector payrolls blew past estimates.
“While (the ADP report) shows that the overall economy remains robust, it also lends to the fear that the Federal Reserve will have to continue raising interest rates in order to effectively combat inflation,” Jones added.
The longer-end 10-year yield (US10Y) was last up 2 basis points to 4.07%, while the more rate-sensitive 2-year yield (US2Y) was down 3 basis points to 4.88%.
Though the debt-related headlines and the labor market data dominated the spotlight, there was also some attention on the earnings season as reports from heavyweight names continued to roll in.
Advanced Micro Devices (AMD) slumped more than 7%, despite the semiconductor company reporting results and guidance that impressed Wall Street.
Starbucks (SBUX) advanced, even though the world’s largest coffee chain posted a miss on comparable store sales.