U.S. stocks tumbled Thursday as Wall Street reeled from another sizable rate hike by Federal Reserve officials and assessed similar moves by monetary policymakers across the Atlantic.
A disappointing reading on consumer spending also raised concerns about the health of the U.S. economy.
The European Central Bank and the Bank of England followed the U.S. Fed in raising interest rates by 50 basis points Thursday morning. The BoE's hike brought rates in the country to their highest since 2008. Indications from each of the banks that further tightening is underway offset optimism over peaking inflation.
The S&P 500 (^GSPC) slid 2.5%, while the Dow Jones Industrial Average (^DJI) shed more than 750 points, or 2.3%, logging its worst day in three months. The technology-heavy Nasdaq Composite (^IXIC) dropped 3.2%.
U.S. Treasury yields edged down, with the benchmark 10-year note falling below 3.5%. The U.S. dollar index nudged higher, and oil prices slipped, with West Texes Intermediate (WTI) crude futures trading around $76 per barrel.
European Central Bank President Christine Lagarde echoed a hawkish tune from Fed Chair Jerome Powell following the monetary authority's rate decision.
“Anybody who thinks that this is a pivot for the ECB is wrong,” Lagarde said in a news conference. “We should expect to raise interest rates at a 50 basis-point pace for a period of time.”
“We have more ground to cover, we have longer to go and we are in for a long game,” she said.
Meanwhile, the U.S. government's retail sales report showed spending fell sharply in November as the key holiday shopping season kicked off. The latest retail sales reading showed a decline of 0.6% over the prior month but a 6.5% increase from the same period last year.
"Black Friday and holiday shopping weren’t enough to save retail sales last month as they decreased the most this year and came in well below expectations," Morgan Stanley's Head of Model Portfolio Construction Mike Loewengart said in a note.
"The consumer has been resilient amid hot inflation and rising rates, but high prices and talks of a recession may have some now second guessing reaching for their wallet," he added. "It’s been a busy week for investors with both the Fed and ECB raising rates, so it shouldn’t be a surprise to see a shaky market."
While a slowdown in retail spending showed sings of economic weakness, another economic release out early Thursday underscored continued tightness in the labor market. Filings for unemployment insurance fell unexpectedly last week to the lowest since September. Initial jobless claims, the most timely snapshot of the U.S. employment situation, came in at 211,000 for the week ended Dec. 10, a decrease of 11,000 from the previous week's revised level, per Labor Department data.
On the corporate front, Tesla (TSLA) stock steadied Thursday after declines all week, even as a regulatory filing showed CEO Elon Musk sold approximately 21,995,000 shares of the company, or roughly $3.6 billion worth, during the three-day period ending Dec. 14. Shares of Tesla are down about 20% in December so far and roughly 55% year-to-date after a sell-off of the electric-vehicle giant accelerated in recent days.
Shares of Lennar (LEN) also turned higher after earlier losses following earnings from the homebuilder late Wednesday that showed an 11% jump in fourth-quarter profit. Lennar closed up 3.8%.
The moves Thursday morning follow declines across the major averages in the previous trading session after the Fed delivered a 50-basis-point increase to its benchmark interest rate. Powell also emphasized that he and colleagues will continue to lift rates in 2023 to an upwardly revised projected terminal rate of 5.1%.
Wednesday's half-percentage point hike, which brought the Fed funds rate to a range of 4.25%-4.5%, did mark a slowdown from the 75-basis-point increases at each of the Fed’s past four policy meetings — the most aggressive stretch of hikes since the 1980s.
Despite a slowdown in the pace and magnitude of increases, Powell continuously asserted that the work by him and his colleagues to tackle stubbornly high inflation was far from over.
“Now that we’ve raised interest rates 425 basis points this year and we’re into restrictive territory, it’s now not so important how fast we go — it’s far more important to think, what is the ultimate level?” Powell said in a press conference with reporters Wednesday. “At a certain point, the question will become, how long do we remain restrictive?”
The Fed’s “dot plot,” which shows estimates by policymakers for interest rates, showed expectations the federal funds rate will increase in 2023 to between 5.1% and 5.4% and in 2024 to still be at a median rate of 4.1% from a previously estimated 3.9% – a change strategists point out is the biggest surprise revision to the central bank’s outlook.
“These estimates are notably more hawkish than their previous forecasts and were not trailed well in advance as is normally the case with the Fed,” William Blair macro analyst Richard de Chazal said in a note.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc