By Sinéad Carew and Amruta Khandekar
(Reuters) – Wall Street’s three major stock indexes closed lower on Thursday, with bank stocks creating the biggest drag while investors worried that Friday’s jobs report could spur aggressive interest rate hikes by the Federal Reserve.
The S&P 500’s bank index hit its lowest level since October as investors fled the sector after tech-industry lender SVB Financial Group launched a share sale to shore up its balance sheet due to declining deposits from startups struggling for funding.
But investors were also stressing out before Friday’s U.S. non-farm payrolls report for February with expectations for large wage increases fueling inflation concerns. Fed Chair Jerome Powell this week exacerbated concerns about upcoming interest rate hikes as he highlighted the battle with high inflation.
Traders were betting that chances of a 50-basis-point rate hike at the Fed’s March meeting were around 60%, according to CME Group’s FedWatch tool, up sharply from a probability of 31% before Powell’s Tuesday and Wednesday appearances in Congress.
“There’s a lot of anticipation around tomorrow’s jobs report. We’re going to get a slew of data in the next week and a half,” said Mona Mahajan, Senior Investment Strategist, Edward Jones, New York, also citing inflation and retail sales reports all due out before the next Fed meeting which ends March 22.
Earlier on Thursday, Labor Department data showed initial claims for state unemployment benefits rose 21,000 to a seasonally adjusted 211,000 for the week ended March 4, compared with economist forecasts for 195,000 claims.
While last week’s increased jobless claims may be “the first sign the labor market may be showing signs of loosening,” Mahajan wants to see “more data points to establish a trend.”
The February non-farm payrolls report is expected to show a February payrolls increase of 205,000 after January’s blowout 517,000 figure, which had already led markets to increase their expectations for U.S. interest rates.
Any proof last month’s “gigantic payrolls number wasn’t an anomaly” would serve to “reinforce the market’s anxieties around the Fed’s response to it,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
And with February wage increases expected to rise 4.7% compared with January’s 4.4%, “it feels like its ticking in the wrong direction even if we just meet expectations,” said Mahajan who will be closely watching the wage data.
According to preliminary data, the S&P 500 lost 72.63 points, or 1.82%, to end at 3,919.38 points, while the Nasdaq Composite lost 234.95 points, or 2.03%, to 11,341.05. The Dow Jones Industrial Average fell 534.19 points, or 1.63%, to 32,264.21.
The biggest drag on the S&P 500 during much of the session came from the financial sector, which was weighed down by bank stocks.
With investors already concerned that the Fed could over-tighten and cause a recession, which would hurt bank lending demand, “there’s an element of ‘sell-first ask questions later’ with regard to contagion risk,” for banks said Luschini at Janney Montgomery Scott.
SVB Financial Group at one point during the session fell around 63% and hit its lowest level since August 2016 after the lender slashed its 2023 outlook and launched a share sale to shore up its balance sheet.
Also weighing on the sub-index was Signature Bank, which tumbled after its crypto-bank peer Silvergate Capital Corp disclosed plans to voluntarily liquidate.
General Electric Co rose as the industrial conglomerate reiterated its 2023 earnings forecast.
(Reporting by Sinéad Carew in New York, Amruta Khandekar, Shristi Achar A and Johann M Cherian in Bengaluru, additional reporting by Medha Singh; Editing by Vinay Dwivedi and Sriraj Kalluvila and David Gregorio)