By Chuck Mikolajczak
NEW YORK (Reuters) – A gauge of global stocks was poised for its biggest daily percentage drop in two weeks on Thursday as a sharp decline in Tesla shares weighed while softening U.S. economic data and growing worries about the debt ceiling pushed Treasury yields lower.
On Wall Street, U.S. stocks closed lower as shares of Tesla sank 9.75%, its largest one-day percentage drop since Jan. 3, after the electric vehicle maker missed gross margin forecasts and pledged further price cuts.
GRAPHIC: Tesla earnings http://fingfx.thomsonreuters.com/gfx/rngs/TESLA-RESULTS/010010144FX/tesla.jpg
Tesla was the biggest drag on the S&P 500 index and pulled the S&P consumer discretionary sector down 1.48% as the worst performing of the 11 major S&P sectors.
Economic data showed weekly jobless claims rose last week, indicating the labor market may be starting to show signs of slowing as the lag effect of multiple interest rate hikes by the Federal Reserve takes hold.
In addition, a gauge of manufacturing activity in the mid-Atlantic region plunged to its lowest level in three years in April while existing home sales fell in March and the Conference Board said its Leading Economic Index dropped 1.2% to its lowest since November 2020.
GRAPHIC: Jobless claims https://www.reuters.com/graphics/USA-STOCKS/akpeqxgzlpr/joblessclaims.png
“The economic data is decelerating, the jobs market, which was the last really strong pillar there, is showing some signs of softness lately. We are going headlong into earnings right now which have been better than feared perhaps but not good enough to keep this rally going,” said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.
“Everyone’s just kind of holding their breath right here after what has been a pretty strong move since mid-March.”
After the data, Cleveland Federal Reserve President Loretta Mester said the central bank still has more interest rate hikes ahead of it, with the policy rate climbing over 5%.
In addition, Fed Governor Michelle Bowman said the central bank is focused on bringing down inflation in order to support a growing economy and climbing incomes, while the solid labor market has made it difficult for growing businesses to find workers. Dallas Federal Reserve Bank President Lorie Logan said she is assessing whether the Fed has made enough progress in combating inflation, looking for further and sustained measures of improvement.
The Dow Jones Industrial Average fell 110.39 points, or 0.33%, to 33,786.62; the S&P 500 lost 24.73 points, or 0.60%, to 4,129.79; and the Nasdaq Composite dropped 97.67 points, or 0.8%, to 12,059.56.
On top of the slowing economic data and rate hike concerns, JP Morgan said it expects the debt ceiling to become an issue as soon as next month, and sees a “non-trivial risk” of default.
Meanwhile, analysts at JPMorgan said they expected the U.S. debt ceiling to become an issue as early as next month. They also cited a “non-trivial risk” of a technical default on Treasuries, joining analysts at Goldman Sachs and Citi in anticipating an earlier debt ceiling deadline.
European shares closed lower on disappointing earnings reports, while the weakness in Tesla weighed on other automakers.
The pan-European STOXX 600 index lost 0.15% and MSCI’s gauge of stocks across the globe shed 0.39%. MSCI’s index was on pace for its biggest one-day percentage decline since April 5.
U.S. Treasury yields declined after the data, along with the concerns about Fed hikes dampening growth and the rising debt ceiling worries. Markets are now pricing in an 86% chance of a 25 basis points hike at the May 2-3 meeting, up from 83.3% on Wednesday, according to CME’s FedWatch Tool.
Multiple Fed officials are expected to speak in closing out the week, before entering a blackout period on April 22 ahead of the May policy announcement.
The yield on 10-year Treasury notes was down 6.8 basis points to 3.534%.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 11.6 basis points at 4.149%, its biggest drop since April 4.
In currency markets, the greenback was lower as the data raised concerns about an upcoming recession, with the dollar index down 0.147%, while the euro was up 0.07% to $1.0962.
The Japanese yen strengthened 0.36% versus the greenback at 134.23 per dollar, while Sterling was last trading at $1.2437, down 0.01% on the day.
Despite the dip in the dollar, oil prices were lower on concerns about a slowing economy and a rise in U.S. gasoline inventories.
U.S. crude settled down 2.36% at $77.29 per barrel and Brent was at $81.10, down 2.43% on the day.
(Reporting by Chuck Mikolajczak; editing by Jonathan Oatis)