How has US business activity impacted market sentiment?

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US Business Rebound Fuels "Higher-for-Longer" Rate Fears, Triggering Market Sell-off

A recent rebound in US business activity, particularly within the services sector, has been interpreted by investors as a signal that interest rates will remain elevated for an extended period to combat inflation. This sentiment led to Wall Street experiencing its worst trading day of the year, with major stock indices experiencing significant declines. The S&P 500 and Nasdaq Composite both closed lower for a third consecutive session, while the Dow Jones Industrial Average saw its 2023 gains erased.
Business Activity Returns to Expansionary Territory

The S&P Global Purchasing Manufacturers' index, a key indicator of US business activity, registered a reading of 50.2 in February. This marks the first time in eight months that the index has returned to expansionary territory, a notable increase from the 46.8 recorded in January. This positive shift was primarily driven by strength in the services sector, indicating a resilient economy despite previous monetary tightening measures.
Investor Interpretation Shifts Towards Prolonged Higher Rates

The positive economic data has prompted a reassessment of the Federal Reserve's monetary policy trajectory. Money market participants are now revising upward their expectations for the peak Federal funds rate, with projections suggesting it could reach 5.35 per cent by July and remain at those levels throughout the year. This outlook stems from the belief that persistent economic vigor, coupled with inflation still far from the Fed's 2 per cent target, necessitates a sustained period of higher interest rates.
Market Indices Suffer Significant Declines

In response to these expectations, Wall Street experienced a broad-based sell-off. The Dow Jones Industrial Average fell by 697.1 points, or 2.06 per cent, to close at 33,129.59. The S&P 500 declined by 81.75 points, or 2.00 per cent, ending the day at 3,997.34. The technology-heavy Nasdaq Composite saw a more substantial drop of 294.97 points, or 2.5 per cent, closing at 11,492.30. All 11 major S&P 500 sectors experienced declines, with consumer discretionary leading the downturn with a 3.3 per cent decrease.
Big Tech and Retail Stocks Face Pressure

Several prominent technology companies experienced notable stock price drops, with Tesla Inc, Amazon.com Inc, Microsoft Corp, and Google-parent Alphabet Inc all falling between 2.1 per cent and 5.3 per cent. This pressure on growth stocks is often exacerbated by rising Treasury yields, which make future earnings less valuable when discounted at higher rates. Additionally, major retailers like Home Depot Inc and Walmart issued cautious forecasts. Home Depot slumped 7.1 per cent after warning of weakening demand and providing a dour profit outlook for 2023, while Walmart's forecast for full-year earnings fell below estimates, citing concerns over rising food inflation impacting profit margins.

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How has US business activity impacted market sentiment?

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