U.S. Stocks See Further Downside Amid Concerns About Monetary Policy Tightening

(RTTNews) - Following the sharp pullback seen in the previous session, stocks saw further downside during trading on Tuesday. With the drop, the S&P 500 continued to give back ground after ending last Friday's trading at a record closing high.

The major averages climbed well off their worst levels of the day but remained in negative territory. The Dow dipped 106.77 points or 0.3 percent to 35,544.18, the Nasdaq tumbled 175.64 points or 1.1 percent to 15,237.64 and the S&P 500 slid 34.88 points or 0.8 percent to 4,634.09.

Concerns about the outlook for monetary policy continued to weigh on the markets, as the Federal Reserve's two-day meeting got underway.

With inflation remaining at an elevated rate, the Fed is widely expected to accelerate its timetable for reducing bond purchases.

Many traders expect the Fed to begin raising interest rates shortly after bringing its asset purchase program to a halt.

Potentially adding to concerns about monetary policy, the Labor Department released a report showing producer prices increased by more than expected in the month of November.

The report said the producer price index for final demand advanced by 0.8 percent in November after climbing by 0.6 percent in October. Economists had expected producer prices to rise by 0.5 percent.

With the stronger than expected monthly price growth, the annual rate of producer price growth accelerated to 9.6 percent in November from 8.8 percent in October.

The Labor Department said the year-over-year spike reflected the largest advance since 12-month data were first calculated in November 2010.

"The Fed has already pivoted to prioritizing inflation, so rather than causing any new inflation panic, this report is just another nail in the coffin for the "wait it out" mindset seen as recently as a month ago," said Will Compernolle, Senior Economist at FHN Financial.

He added, "Supply chain pressures should ease in the next few months as holiday shopping lets up and producers have more time to adjust capacity, but the impacts on producer prices and then to consumer prices will not be immediate.

Lingering worries about the new Omicron variant of the coronavirus may also have generated some selling pressure after the World Health Organization warned the new variant is spreading faster than previous strains.

Sector News

Software stocks turned in some of the market's worst performances on the day, resulting in a 3.3 percent nosedive by the Dow Jones U.S. Software Index.

Considerable weakness was also visible among housing stocks, as reflected by the 1.8 percent slump by the Philadelphia Housing Sector Index.

Oil service stocks also came under pressure over the course of the session after seeing early strength, dragging the Philadelphia Oil Service Index down by 1.6 percent.

The downturn by oil service stocks came as the price of crude oil for January delivery fell $0.56 to $70.73 a barrel amid concerns about the outlook for energy demand.

Gold, commercial real estate, networking and transportation stocks also showed notable moves to the downside, while some strength was visible among steel and banking stocks.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Tuesday. Japan's Nikkei 225 Index slid by 0.7 percent, while Hong Kong's Hang Seng Index plunged by 1.3 percent.

The major European markets also moved to the downside over the course of the session. While the U.K.'s FTSE 100 Index edged down by 0.2 percent, the French CAC 40 Index fell by 0.7 percent and the German DAX Index slumped by 1.1 percent.

In the bond market, treasuries regained ground after seeing early weakness but still closed modestly lower. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, inched up by 1.4 basis points to 1.438 percent.

Looking Ahead

With the Fed announcement in focus, trading activity may be somewhat subdued in the lead up to the release of the statement Wednesday afternoon.

Traders are still likely to keep an eye on a slew of U.S. economic data, including reports on retail sales, import and export prices, and homebuilder confidence.