U.S. equity markets lost momentum in the final hour of trading on Wednesday as investors continued to parse three-hour testimony from the head of the Federal Reserve.
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The Dow Jones Industrial Average shed 99 points, or 0.62% to 15914. The S&P 500 slipped a fraction of a point, or 0.02% to 1851, while the Nasdaq Composite added 14 points, or 0.35% to 4283.
Technology, health care, and consumer discretionary led most of the S&P 500 sectors higher, while utilities dragged.
The broader averages extended a three day losing streak to four, despite a healthy early-morning rally, on the back of the comments from Fed Chief Janet Yellen.
The chairwoman began two days of testimony on Capitol Hill in front of the House Financial Services Committee talking about several hot button issues including the outlook for the U.S. economy, negative interest rate policy, and the risk of a global recession. It was the first time she spoke publicly about the central bank’s monetary policy and her view on the economy since the Fed opted to raise rates for the first time in nearly a decade in December.
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In prepared remarks, Yellen said while the U.S. economy has continued to make progress, tighter financial conditions due to heightened market volatility, have become less supportive of growth, and if they continue, they could impact further growth. She spoke specifically about China’s economic outlook and its impact on world markets.
“As is always the case, the economic outlook is uncertain. Foreign economic developments in particular pose risks to the U.S. economic growth...This uncertainty led to increased volatility in global financial markets and, against the backdrop of persistent weakness abroad, exacerbated concerns about the outlook for global growth,” she explained.
Further, she said low commodity prices could “trigger financial stresses in commodity-exporting economics,” which could decrease demand for U.S. exports and tighten financial-market conditions even more.
In response to a question about the legality of possible negative interest rates, Yellen said that the Federal Open Market Committee (FOMC) had considered lowering rates into negative territory during the financial crisis in 2010, but decided against it.
“I would say [the legality] remains a question. We would still need to investigate it more thoroughly,” Yellen said.
She added though that despite recent financial-market and economic headwinds, the central bank would be unlikely to drop rates into negative territory.
Kevin Kelly, managing partner at Recon Capital, said it would be “absurd” for the Fed to go negative on rates at this point.
“We’ve seen the dollar weaken against the euro, and just given where the market has been, especially the credit market and equities, there has already been some tightening, so the Fed doesn’t need to do that again. There’s no indication for the Fed to go negative on rates,” he explained.
Since December, a number of S&P 500 sectors have dropped into bear-market territory, while the broader index is down more than 9% for the year. Recent data have also shown the manufacturing sector remains in contraction, while services slowed, and the labor market continues to make incremental gains.
Deutsche Bank economists, in a note following Yellen’s prepared remarks, said while the Fed chief remained dovish, she did not push back market expectation for a delay in rate-hike action until much later in the year.
“This is consistent with the Committee being data-dependent, and at the moment, they are acknowledging that the data at hand warrant a more gradual path of rate hikes than what the Committee had envisioned at the December meeting,” the note said.
Robin Anderson, senior economist at Principal Global Investors, which oversees $331 billion in assets under management, said she expects two more rate hikes this year starting in June.
“The decline in oil prices and the strength in the dollar, up until last week, point to continued lack in inflation pressure,” she said. “The recent jobs report suggests the U.S. labor market is absorbing slack – the unemployment rate fell below 5%, wage growth is trending upward, and unit labor costs are rising.”
Following Yellen’s remarks, Fed Funds futures showed little expectation for the Fed to move on rates again for the remainder of the year, pushing expectations out into 2017. Meanwhile, the yield on the benchmark 10-year U.S. Treasury bond fell 0.017 percentage point to 1.712%. Yields move inversely to prices.
As Wall Street awaited Yellen’s comments, they took a cue from European markets, which rallied as bank shares there recovered from a recent route as investors took the opportunity to buy at discounted levels. The Euro Stoxx 50, which tracks large-cap companies in the eurozone, along with the German Dax, and French CAC 40, jumped more than 2%, while the UK’s FTSE 100 gained about 1%.
Meanwhile, oil prices continued to waver as they traded along the flat line. Inventory data from the Energy Information Administration showed U.S. stockpiles unexpectedly declined last week. Crude stocks declined by 754,000 barrels to 501.96 million barrels, compared to expectations for a 3.6 million barrel build.
Overnight, the Organization of the Petroleum Exporting Countries slashed its outlook for global oil-demand growth, saying the multi-year low prices were hurting nations like Russia and Brazil, while consumer demand remained weak.
West Texas Intermediate declined 1.75% to settle at $27.45 a barrel, while Brent, the international benchmark, gained 1.72% to $30.84.
Prices were limited by a lack of commitment from OPEC to seriously consider a production cut. That would help prices find more stability and help alleviate the global supply glut.
“Oil continues to keep its head just above the $30 a barrel level, but without an OPEC resolution and no real change in the supply and demand balance, it only looks a matter of time before gravity kicks in again,” IG market analyst Alastair McCaig said in a note.
Traders on Wednesday also kept an eye on fourth-quarter earnings season with several key reports after the bell including Cisco (CISCO), Tesla (TSLA), Whole Foods (WFM), and Twitter (TWTR). All eyes will be particularly focused on the social-media giant and its growth numbers have been less than stellar and users are worried about changes coming to the platform. On Tuesday, the company’s shares hit a new all-time low of $14.60.