Dow finishes nearly 200 points lower as Treasury yields rise

What drove markets?

Big technology stocks led declines Thursday with the 2-year Treasury yield trading around 40 basis points above the 10-year yield, suggesting an economic slowdown ahead as investors digested a mixed batch of economic data.

The yield on the 2-year Treasury note climbed for a sixth straight trading session on Thursday, reaching its highest level since October 2007. The 2-year yield BX:TMUBMUSD02Yrose 8.9 basis points to 3.871%, while the 10-year yield BX:TMUBMUSD10Y was up 4.7 basis points to 3.458%.

“There are three inputs driving markets today and the largest of them is people being hyper-focused on the yield curve, especially the two year, which remains stubbornly high,” said Art Hogan, chief market strategist at B. Riley Financial.

“This is a reflection of our interpretation of what monetary policy will be in the short term,” he said.

With stocks still smarting from Tuesday’s disappointing U.S. consumer price inflation data which triggered the worst one-day selloff in two years, investors were relieved though that a nationwide railway strike had been averted.

See: White House says tentative pact has been reached to avoid railway strike

The stocks of railroad operators were mixed as President Biden spoke publicly to confirm news of the deal, with Union Pacific Corp.
UNP,
+0.19%
up 0.2%, while Canadian Pacific Railway Limited
CP,
-1.81%
finished 1.3% lower. The Dow Transportation Average
DJT,
-1.06%
was down 1.1%.

In U.S. economic data Thursday, retail sales rose 0.3% in August as Americans spent more on new cars and trucks and went out to eat more, suggesting the economy grew at a steady pace toward the end of the summer.

Meanwhile new jobless benefit claims fell by 5,000 to 213,000 in the week ended Sept. 10, the Labor Department said, suggesting the labor market remains healthy.

However, two regional gauges of manufacturing sentiment moved into slight contraction territory in September, according to data released Thursday.

As the weekend approaches, market participants are looking ahead to next week’s two-day Federal Reserve policy meeting, where the central bank is largely expected to hike its benchmark interest rate by 75 basis points or more.

Tim Courtney, chief investment officer of Exencial Wealth Advisors, said the decision, which is due out Thursday, Sept. 22, will not be a shock to markets.

“What the Fed is doing is they realized that dropping rates to zero created so many distortions across the market that they want to go the other way,” Courtney told MarketWatch via phone. “They’re going to want to err on too-tight side rather than too-loose side, because they know they had a big hand in causing this inflation.”

“I think they might now raise rates in November just before the midterm elections and possibly December,” said Louis Navellier of Navellier and Associates in Nevada. “After that, they should be done. I think the Fed’s goal is to get rates up and then observe what it does to the economy. They have already hurt the housing market and they’re going to hurt other interest rates-sensitive parts of our economy.”

Stocks in focus

• Adobe Inc. ADBE shares ended 16.8% lower after the software company fell short with its revenue outlook for the current quarter and announced plans for a $20 billion merger deal.

• Shares of Humana Inc.
  HUM,
  +8.37%
  were up 8.4% as the company raised its profit outlook.

• Valero Energy Corp.
  VLO,
  -4.04%,
  Chevron Corp.
  CVX,
  -1.62%
  and Exxon Mobil Corp.
  XOM,
  -2.91%
  traded lower, along with most of the oil and gas stocks on the S&P 500, as oil prices dropped. West Texas Intermediate crude for October delivery
  CL.1,
  -0.41%

  CLV22,
  -0.41%
  tumbled about 3.8%, while the Energy Select Sector SPDR Fund
  XLE,
  -2.58%
  was down 1.8%.

—Steve Goldstein contributed to this article

Hear from Carl Icahn at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The legendary trader will reveal his view on this year’s wild market ride.