U.S. stocks dropped on Thursday as investors digested data validating the Federal Reserve’s assertion that the economy is robust enough to withstand more tightening. Technology stocks were battered after a gloomy outlook from chipmaker Micron Technology Inc. weighed on sentiment. 

• Sign up to get breaking news email alerts sent directly to your inbox

The S&P 500 closed the session down 1.4 per cent, after falling as much as 3 per cent during trading hours. The tech-heavy Nasdaq 100 declined as much as 4 per cent, but pared its drop to end Thursday down 2.5 per cent. The dollar gained. The policy-sensitive, two-year Treasury yield climbed to 4.27 per cent. Oil snapped a three-day rally.

Data released on Thursday painted a picture of a resilient economy, stoking concern that the Fed has a longer way to go to subdue inflation. Initial jobless claims rose less than forecast in the week ended Dec. 17, underscoring the strength in the labor market. Third-quarter gross domestic product was revised to 3.2 per cent — compared with a previously reported 2.9 per cent advance — on firmer spending. 

“Today’s data is telling us that the consumer has a lot more strength than I think what the market was pricing in,” Priya Misra, head of global rates strategy at TD Securities, said on Bloomberg Television. “When the accumulated savings they’ve had since Covid, when that runs out, which we think happens by the middle of next year, that’s when consumer spending slows down.”

U.S. inflation is going to be “sticky” on the way down because the labor market has remained resilient so far, Misra said. That’s going to keep the Fed on its path of rate hikes, she said. 

“So we actually think that the Fed’s going to be hiking all the way up until May to reach 5.5 per cent, and then be very reluctant to ease policy,” she said. “I mean, we have a recession in our base case, but we think the Fed’s going to be very late in terms of when they can start to ease because of that sticky inflation.”

Bearish comments from investor David Tepper, who told CNBC he’s “leaning short” on U.S. equities next year because of global tightening, added to the risk-off sentiment on Thursday.

The S&P 500’s large decline this month contrasts with an average 1.5 per cent December gain since 1950, providing sidelined global investors with plenty of “dry powder” to put to work, according to analysts at SEB. Meanwhile, technology stocks are headed for their worst December since the bursting of the dotcom bubble 20 years ago. 

Concerns are also growing that Japanese investors could be persuaded to bring home some of the trillions of dollars they have stashed in foreign stocks and bonds as the yen and local bond yields rise in the wake of this week’s sudden hawkish move from the Bank of Japan. That could further lift global borrowing costs and drag on already cooling economic growth, with euro zone bonds seen especially vulnerable.

Key events this week:

• U.S. consumer income, new home sales, U.S. durable goods, PCE deflator, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.4 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 2.5 per cent
• The Dow Jones Industrial Average fell 1 per cent
• The MSCI World index rose 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.1 per cent
• The euro was little changed at US$1.0599
• The British pound fell 0.3 per cent to US$1.2042
• The Japanese yen was little changed at 132.38 per dollar

Cryptocurrencies

• Bitcoin was little changed at US$16,786.89
• Ether rose 0.5 per cent to US$1,217.92

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.68 per cent
• Germany’s 10-year yield advanced five basis points to 2.36 per cent
• Britain’s 10-year yield advanced two basis points to 3.59 per cent

Commodities

• West Texas Intermediate crude fell 0.2 per cent to US$78.11 a barrel
• Gold futures fell 1.4 per cent to US$1,800.70 an ounce