Stocks tumble as tech shares slide and bond yields climb.
Investors, weighing the prospect of the Federal Reserve preparing to reduce its purchases of government debt, sold off bonds, pushing the 10-year’s yield up to 1.53 percent, its highest level since June.
U.S. stocks fell on Tuesday, with the S&P 500 falling 2 percent by midday, putting the index on track for its worst day since May.
The trigger for Tuesday’s sell-off was a rise in the yield on the benchmark 10-year Treasury note. Investors, weighing the prospect of the Federal Reserve preparing to reduce its purchases of government debt, sold off bonds, pushing the 10-year’s yield up to 1.53 percent, its highest level since June.
Government bond yields are the basis for borrowing costs across the economy, and a rise can hinder the stock market’s performance because it makes owning bonds more attractive and can discourage riskier investments.
Tech stocks are particularly sensitive to the prospect of higher interest rates, and those companies’ shares were hard-hit on Tuesday. The tech-heavy Nasdaq composite was down 2.7 percent at midday.
Higher rates can also make borrowing more expensive for companies, in particular smaller ones, and the jump in yields hit shares of several high-flying stocks hard. Etsy, the online craft marketplace, was off as much as 7.5 percent, and Shopify was off 5.4 percent. Both companies have soared during the pandemic and were still up more than 20 percent for the year.
“With tech stocks, you’re betting for a company to have a breakthrough years from now,” said Beth Ann Bovino, the chief U.S. economist at S&P Global. “If interest rates go up today, that value that you receive years from now is discounted.”
The vast pull the big tech companies have — particularly Amazon, Apple, Microsoft, Google and Facebook — also helped drag down the S&P 500. Apple was down 2.3 percent and was the best performer of the tech giants. Amazon, Microsoft, Facebook and Google were down by more than 3 percent.
It helped a little that energy stocks rallied after oil prices climbed early in the day. Schlumberger, Baker Hughes and Marathon Oil were among the best-performing shares in the S&P 500, though their gains faded as oil futures turned lower later in the day.
The trading echoes the volatility of earlier this year, when a jump in rates roiled financial markets. That rise happened as traders worried that higher inflation might cause the Fed to increase rates sooner than they had forecast.
“There’s no doubt that the equity market does not like higher rates — there’s just no debate about it,” Ralph Axel, director of U.S. Rates Strategy at Bank of America.
Investors were also concerned as Treasury Secretary Janet L. Yellen warned lawmakers on Tuesday of “catastrophic” consequences if Congress does not deal with the debt limit before Oct. 18. Ms. Yellen suggested that a default would jeopardize the dollar’s status as the international reserve currency.
Lauren Goodwin, an economist at New York Life Investments, wrote in a note to investors that risks like that “should do little to impact the broader fundamental environment.”
She said the forces affecting investor confidence would instead remain those that have been most at play throughout the past 18 months.
“The path will depend heavily on our three highly uncertain drivers — the pandemic, monetary policy and fiscal policy,” she wrote.
The central bank has signaled that it will begin to slow its massive bond purchase program as soon as November. That policy has been keeping money flowing through financial markets, but officials have decided that it is less necessary as the economy rebounds.
The Fed’s main policy interest rate — its more powerful and traditional tool — remains near zero. Mr. Powell and his colleagues have signaled that the Fed is months or years away from raising interest rates, because it wants to see the job market return to full strength before doing so.
“The test for raising interest rates is substantially higher,” Mr. Powell reiterated at a Senate Banking Committee hearing on Tuesday. “We want to see” a “labor market that is very strong, we want to see the kind of reductions in disparities — the kind of thing that we did see before the pandemic arrived.”
The S&P 500 is on track to drop 3 percent in September, ending seven straight months of gains.
Jeanna Smialek contributed reporting.
Brent crude, the international oil benchmark, touched $80 a barrel on Tuesday for the first time in nearly three years amid growing signs of an energy crunch.
Oil prices have leapt by about a quarter over the last month as fears of a looming tight market have overcome concerns about the Delta variant of the coronavirus slowing the global economic recovery. Soaring prices for natural gas are also influencing the oil market, analysts say, as some industrial users of gas switch to oil and other fuels.
This may be the first time that “gas impacts oil and not the other way around,” said Carlos Torres Diaz, head of gas and power at Rystad Energy, a consulting firm.
Brent crude rose as high as $80.70 a barrel on Tuesday, before falling back to $78.94..
Analysts say outages caused by Hurricane Ida, which damaged oil platforms and infrastructure in the Gulf of Mexico in late August, have outweighed the modest increases in output agreed by the Organization of the Petroleum Exporting Countries in July.
OPEC and its allies including Russia are likely to come under pressure to speed up their plans for supply increases when the group meets by teleconference on Monday. The Biden administration has already criticized the group for not doing enough to cushion price increases.
The long lines at gas stations in Britain, while caused by shortages of fuel truck drivers rather than oil, may also be adding upward pressure to prices.
Analysts at Goldman Sachs recently forecast that Brent would hit a peak of $90 a barrel in December, noting that global inventories are being burned off at what they described as a record rate.
“The current global oil supply-demand deficit is larger than we expected,” they wrote.
At the same time, the analysts said, successful coronavirus vaccine programs are “leading more countries to reopen, including to international travel.”
Aviation fuel has been the key laggard in the global recovery of oil demand, so a pickup in air travel would be an important factor in bolstering the market.
Senator Elizabeth Warren, Democrat of Massachusetts, blasted the Federal Reserve chair, Jerome H. Powell, for his financial regulation track record and said that she would not support him if the White House renominated him, calling him a “dangerous man to head up the Fed.”
Mr. Powell’s term as head of the central bank ends in early 2022, and the Biden administration is considering whether to reappoint him. Mr. Powell, a Republican, was nominated to the Fed’s Board of Governors by former President Barack Obama and elevated to chair by former President Donald J. Trump.
While some prominent Democratic economists and advocacy groups support Mr. Powell, who has been intensely focused on the labor market during his term as Fed chair, some progressives openly oppose him. They often cite his track record on financial regulation — as Ms. Warren did to his face on Tuesday, as he testified before the Senate Banking Committee.
“The elephant in the room is whether you’re going to be renominated,” Ms. Warren said, looking down at the Fed chair during the hearing. “Renominating you means gambling that, for the next five years, a Republican majority at the Federal Reserve, with a Republican chair who has regularly voted to deregulate Wall Street, won’t drive this economy over a financial cliff again.”
Ms. Warren, and those who agree with her, have worried that leaving Mr. Powell in place will prevent the Fed from taking a tougher stance on financial regulation. Mr. Powell has said that when it comes to regulatory matters, he defers to the Fed’s vice chair for supervision, noting that Congress created that job to lead up bank oversight following the 2008 financial crisis.
“I respect that that’s the person who will set the regulatory agenda going forward,” Mr. Powell said during a news conference last week. “And furthermore, it’s fully appropriate to look for a new person to come in and look at the current state of regulation and supervision and suggest appropriate changes.”
Ms. Warren’s colleague Senator Michael Rounds, a Republican from South Dakota, followed her scathing comments by saying that Mr. Powell deserved to be renominated, and that he looked forward to working him for the next several years.
The White House has so far given little indication of whom it will pick to lead the central bank.
President Biden already has the opportunity to fill one open governor position at the Fed, and several other roles will soon become available: The governor seat of the Fed’s vice chair, Richard Clarida, will expire in the coming months, as will Randal K. Quarles’s position as vice chair for supervision. The openings could give the administration a chance to remake the central bank from the top with its nominations, who must pass Senate confirmation.
Other lawmakers at the Senate hearing pushed Mr. Powell to focus on improving diversity at the central bank — highlighting another key concern among Democrats as the leadership shuffle gets underway.
Senator Sherrod Brown, a Democrat from Ohio and the head of the Senate Banking Committee, pointed out that there had never been a Black woman on the Federal Reserve’s Board of Governors in Washington, while also referring to reporting from earlier this year that showed a dearth of Black economists at the central bank.
He asked if Mr. Powell believed that the central bank should have a Black woman on its Board of Governors.
“I would strongly agree that we want everyone’s voice heard around the table, and that would of course include Black women,” Mr. Powell said. “We of course have no role in the selection process, but we would certainly welcome it.”
Lisa Cook, a Michigan State University economist, and William Spriggs, chief economist of the labor union AFL-CIO, are often raised as possible candidates for governor positions or leadership roles. Both are Black. Lael Brainard, a white woman who is currently a Fed governor, is frequently raised as a possible replacement for Mr. Powell if he is not renominated, and Sarah Bloom Raskin, a white woman who is a former top Fed and Treasury official, is often suggested as a replacement for Mr. Quarles.
Mr. Powell, as he noted, has no formal role in selecting his future colleagues at the Fed Board.
He and his colleagues at the Fed Board will, however, have a chance to weigh in on who will take over two newly open positions around the Fed’s decision-making table. The central bank has 19 total officials at full strength, seven governors and 12 regional bank presidents.
Robert S. Kaplan, the Dallas Fed president, and Eric S. Rosengren, the Boston Fed president, both announced their imminent retirements on Monday, amid widespread criticism of the fact that they were trading securities in 2020 — during a year in which the Fed unrolled a widespread market rescue in response to the pandemic.
Mr. Powell addressed that scandal on Tuesday, pledging to lawmakers that the Fed would change its ethics rules and saying that the Fed was looking into the trading activity to make sure it was in compliance with those rules and with the law.
“Our need to sustain the public’s trust is the essence of our work,” Mr. Powell said, adding that “we will rise to this moment.”
Beyond grabbing headlines, the departures will leave two regional bank jobs available at the Fed. The regional branches’ boards, except for bank-tied members, will search for and select replacement presidents. The Fed’s governors in Washington have a “yes” or “no” vote on the pick.
The Fed has never had a Black woman as a regional bank president, either. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, is the first Black man to serve in one of those roles.
At the Board of Governors, Mr. Quarles’s leadership term ends most imminently, on Oct. 13. His position as governor does not expire until 2032, and he has signaled that he will likely stay on as a Fed governor at least through the end of his leadership term at the Financial Stability Board, a global oversight body, in December. Mr. Powell’s leadership term ends in early 2022, though he could stay on as governor since his term in that role does not expire until 2028. Mr. Clarida will have to leave early next year unless he is reappointed.
Treasury Secretary Janet L. Yellen on Tuesday warned lawmakers of “catastrophic” consequences if Congress failed to soon raise or suspend the statutory debt limit, saying inaction could lead to a self-inflicted economic recession and a financial crisis.
At a Senate Banking Committee hearing where she testified alongside the Federal Reserve chair, Jerome H. Powell, Ms. Yellen laid out in explicit terms what she expects to happen if Congress does not deal with the debt limit before Oct. 18, which Treasury now believes is when the United States will actually face default.
Seniors could see their Social Security payments delayed, soldiers would not know when their paychecks were coming and interest rates on credit cards, car loans and mortgages would rise, making payments more costly, she warned. She also suggested that a default would jeopardize the dollar’s status as the international reserve currency, which Democrats argue would be a gift to China.
“It would be disastrous for the American economy, for global financial markets, and for millions of families and workers whose financial security would be jeopardized by delayed payments,” Ms. Yellen said.
Ms. Yellen and Mr. Powell, America’s two top economic policymakers, also warned lawmakers on Tuesday that the Delta variant of the coronavirus had slowed the economic recovery, but they said the economy was continuing to strengthen.
Their testimony comes at a critical moment in the economic recovery. Businesses are facing labor shortages and consumers are coping with rising prices amid a resurgent pandemic. Congress is also grappling with a thicket of legislative challenges in the coming days, all of which could have an impact on the economy.
Those challenges include the need to extend federal funding to avoid a U.S. government shutdown; raising the debt limit to prevent defaulting on the nation’s financial obligations; and passing President Biden’s infrastructure and social safety net packages.
In a letter to Congress ahead of the hearing and in her opening remarks, Ms. Yellen said that Treasury is likely to exhaust the “extraordinary measures” she has been employing to delay a default if Congress has not acted by Oct. 18.
“At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she wrote. “It is uncertain whether we could continue to meet all the nation’s commitments after that date.”
For weeks, Ms. Yellen has been quietly pressing lawmakers to put politics aside and ensure that the United States can continue to meet its fiscal obligations. She has been in touch with Wall Street chief executives and former Treasury secretaries as she looks to keep markets calm and find allies who can help her make the case to recalcitrant Republicans, who believe Democrats must deal with the debt limit on their own.
“It is imperative that Congress swiftly addresses the debt limit,” Ms. Yellen said. “The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession.”
The debt limit is traditionally addressed on a bipartisan basis, but Republicans are refusing to join Democrats in passing legislation to lift the borrowing cap. Republicans argue that Democrats have the votes to lift the debt limit on their own and that they should do so. Democrats argue that Republicans are playing a dangerous political game.
In a tense exchange with Senator John Kennedy, Republican from Louisiana, Ms. Yellen said it was possible that Democrats could lift the debt limit on their own but that Republicans were shirking their responsibility by refusing to cover debts they helped incur.
“It is very important to recognize that raising the debt ceiling is about paying bills that Congress has incurred in the past,” Ms. Yellen said, noting that deficits have been run under Democratic and Republican administrations “It’s a shared responsibility.”
Mr. Kennedy, who was unconvinced, said that Democrats just wanted to tie Republicans to their big spending plans and that a crisis could be averted by Democrats.
“Easy, peasy. Finished. Let’s go have a cocktail,” Mr. Kennedy told Ms. Yellen.
Ms. Yellen also told lawmakers that the economy, while strengthening, is still in a “fragile” state.
“While our economy continues to expand and recapture a substantial share of the jobs lost during 2020, significant challenges from the Delta variant continue to suppress the speed of the recovery and present substantial barriers to a vibrant economy,” Ms. Yellen said in her opening remarks. “Still, I remain optimistic about the medium-term trajectory of our economy, and I expect we will return to full employment next year.”
Ms. Yellen and Mr. Powell will testify again on Thursday before the House Financial Services Committee.
Erin Griffith (@eringriffith) and Erin Woo (@erinkwoo), two of our tech reporters, are covering the trial of Elizabeth Holmes, who dropped out of Stanford University to create the blood testing start-up Theranos at age 19 and built it to a $9 billion valuation and herself into the world’s youngest self-made female billionaire — only to flame out in disgrace after Theranos’s technology was revealed to have problems.
Follow along here or on Twitter as she is tried on 12 counts of wire fraud and conspiracy to commit wire fraud. The trial is generally held Tuesdays, Wednesdays and Fridays.
Wade is asking about Holmes’s education. Famously, she dropped out of Stanford. “Based on your understanding of her background, would she be qualified to be a CLIA supervisor or lab director? Rosendorff: “No, definitely not.”
Wade says, and Rosendorff concedes, that ultimately it was Rosendorff’s responsibility if the tests failed and his responsibility to enforce quality control policies and proficiency tests.
Rosendorff is agreeing with Wade’s questioning that Holmes never told him to report an inaccurate result, and that Holmes never directed him not to pause or discontinue tests he thought were inaccurate.
Wade: “Did you ever use a test on patients that you believed was inaccurate or unreliable?” Rosendorff: “No.” Did he ever provide results that he believed to be unreliable? “No.”
Wade: “Did you faithfully dispatch your legal obligations as lab director at Theranos?” Rosendorff: “Yes, I did.” Wade: “Did you offer lab tests that you knew at the time were inaccurate or unreliable?” Rosendorff: “No … I ordered the laboratory to cease testing.”
The cryptocurrency exchange Coinbase announced on Monday that it would soon allow customers in the United States to deposit money from their paychecks directly into their crypto accounts.
Customers can keep that money in dollars or automatically convert it into Bitcoin or other cryptocurrencies. This means that users can “more easily make regular crypto trades,” Prakash Hariramani, Coinbase’s senior product director, wrote in a blog post.
Crypto companies are rapidly creating an alternative banking universe. Coinbase is one of many blockchain businesses aiming to offer services similar to those of traditional banks, like loans, savings accounts and debit and credit cards. Allowing direct deposits could make it easier for Coinbase customers to migrate their financial lives away from old-school financial institutions.
“Customers tell us that making frequent transfers is time-consuming and inconvenient,” Mr. Hariramani wrote.
The industry’s move into banking is causing alarm in Washington. Last week, Coinbase said that it would drop a proposed interest-generating product, called Lend, after the Securities and Exchange Commission threatened to sue because the service could violate securities laws. Notably, Lend would have been based on USD Coin, a stablecoin whose value is pegged to the dollar but was recently found not to be backed one-for-one with dollars, as claimed. U.S. financial regulators will soon issue a report on regulating the fast-growing stablecoin sector.
More regulation seems inevitable. Officials fear that crypto firms without the same reserve requirements and capital controls as traditional financial institutions will lure users with high yields and low fees without revealing the risks that come with these accounts. Big banks and their trade associations have also made that case, all while striking deals with the upstart competitors to get in on the action.
It has been increasingly clear that shortages of semiconductors, raw materials and other goods are having a tangible effect on growth, but precisely how much was hard to gauge. On Tuesday, Christine Lagarde, the president of the European Central Bank, put a number on it.
Exports from the eurozone would have been almost 7 percent higher during the first six months of 2021 if not for supply bottlenecks, she said, citing analysis by central bank economists.
More than 40 percent of the eurozone’s gross domestic product is based on exports, so 7 percent of lost sales amounts to a substantial blow to overall growth. By comparison, exports account for only 12 percent of the U.S. economy.
“These risks to growth could mount if the pandemic continues to affect global shipping and cargo handling as well as key industries like semiconductors,” Ms. Lagarde said in a speech.
Ms. Lagarde also had some good news. After the steepest collapse on record, she said, the eurozone has bounced back more quickly than expected. Despite supply issues, economic output will exceed the prepandemic level by the end of this year, she said, nine months sooner than expected.
Southern California Gas and its parent company, Sempra Energy, have agreed to pay up to $1.8 billion as part of a settlement agreement announced on Monday related to the nation’s biggest natural gas leak.
The settlement would resolve nearly all of the 35,000 claims filed by individuals and businesses after SoCal Gas’s Aliso Canyon natural gas storage facility blew out in 2015. The leak at the facility, in the Santa Susana Mountains northeast of Los Angeles, forced thousands of people from their homes in and around the Porter Ranch community, sickening many from the stench of chemicals wafting through the air near the plant.
From October 2015 to February 2016, the gas company worked to contain the leak, which released nearly 100,000 tons of methane and other substances into the air. Sempra had to temporarily close the facility, at one of the largest natural gas fields in the country. At the time, the leak raised concern among regulators about gas shortages that ultimately never happened.
“Our goal has always been obtaining justice for the men, women and children who were failed by SoCal Gas throughout every turn of this catastrophe,” said Brian Panish, the lead trial lawyer for the plaintiffs.
Scott Drury, the chief executive of SoCal Gas, said in a statement announcing the settlement that the company had worked to improve its operations as a result of the leak and had aimed to maintain new standards to ensure residents’ safety.
“These agreements are an important milestone that will help the community and our company work toward putting this difficult chapter behind us,” Mr. Drury said. “In the years since the leak, SoCal Gas has worked alongside regulators, technical experts and our neighbors to enhance safety at all our underground storage facilities and our engagement with the community.”
Plaintiffs can agree to accept the settlement until June 1.
Two Federal Reserve officials embroiled in controversy for trading securities that could have benefited from the central bank’s 2020 intervention in financial markets announced on Monday that they would leave their positions.
Robert S. Kaplan, who heads the Federal Reserve Bank of Dallas, will retire on Oct. 8, according to a statement released Monday afternoon. Eric S. Rosengren, the president of the Boston Fed, will retire this Thursday, accelerating his planned retirement by nine months.
The resignations followed the Fed’s announcement earlier this month that the Fed chair, Jerome H. Powell, had ordered a review of the central bank’s ethics rules in light of the controversy surrounding the trades.
Creative Artists Agency announced Monday that it was buying its smaller rival ICM Partners for an undisclosed amount, the largest industry consolidation in more than a decade and one that could have significant ripple effects in the entertainment and sports worlds.
The agencies’ top executives — Bryan Lourd at CAA and Chris Silbermann at ICM — positioned the deal as a supercharging of the representation business and an opportunity for CAA to expand in both publishing and sports. ICM has a substantial books division and sports assets that include the recently acquired N.F.L. agency Select Sports Group and the London-based soccer agency Stellar Group.
Today in the On Tech newsletter, Shira Ovide writes that Facebook may finally be paying the price for its bad reputation.