The relentless rally in US stocks lost some traction on Wednesday as the Federal Reserve signaled interest-rate hikes are still on the table after pausing its tightening cycle in June to assess economic conditions.
(Bloomberg) — The relentless rally in US stocks lost some traction on Wednesday as the Federal Reserve signaled interest-rate hikes are still on the table after pausing its tightening cycle in June to assess economic conditions.
Following the usual whirlwind of Fed days, the S&P 500 closed with a gain of only 0.1%. The small move drove the gauge to its fifth straight advance, the longest winning run since November 2021. Equities recovered some ground amid a rebound in big tech and as Jerome Powell said no decision has been made for the next few meetings.
“The Fed may have paused today, as expected, but they probably raised a few eyebrows with their hawkish language,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “The inflation battle was always slated to be a long one, and there’s likely to be more bumps in the road for the market.”
Powell also said nearly all Fed officials expect it will be appropriate to raise interest rates “somewhat further” in 2023 to bring down inflation. “Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate,” he noted, suggesting that such a decision would be a couple of years out.
Bond traders are nearly wiping out bets that the Fed will lower interest rates this year. Rates on swap contracts referencing future Fed policy meetings reflect a peak rate of about 5.3% in September after the central bank’s decision, while the December contract’s rate jumped to about 5.2%.
The Fed decision left the benchmark federal funds rate in a target range of 5% to 5.25%. Fresh quarterly Fed forecasts showed borrowing costs rising to 5.6% by year end, according to the median projection, compared with 5.1% in the previous round of projections.
Treasury two-year yields, which are more sensitive to imminent Fed moves, climbed two basis points to 4.69%. The dollar remained near a one-month low.
In corporate news, Advanced Micro Devices Inc. rallied as the chipmaker showed off its planned line of artificial intelligence processors. Nvidia Corp. hit an all-time high, extending this year’s surge. Tesla Inc. fell, snapping its record-setting 13-day winning streak. UnitedHealth Group Inc. slumped after an executive said a recent increase in surgeries and other medical care might push expenses higher than anticipated.
More Comments on Fed:
- Greg McBride at Bankrate:
“The Fed is taking a breather. But it will likely be very short-lived, with rate hikes potentially resuming as soon as July. For now, the Fed will use this time to take in more data on inflation, the health of the economy, and tightening credit conditions before deciding what comes next.”
- Jason Pride at Glenmede:
“No rate hike this month does not necessarily mean that the Fed is finished raising rates this cycle. It is more likely that today’s decision will prove to be a ‘skip’ ahead of another rate hike at the July meeting than a prolonged pause in the rate hike campaign.”
- Edward Moya at Oanda:
“The Fed statement and projections were very hawkish, but Powell’s presser was a bit optimistic regarding their inflation fight and non-commital for a July rate hike. The S&P 500 recovered initial losses as traders believe the Fed is becoming a bit overly aggressive on what will be needed to get inflation all the way down.”
- Andrew Slimmon at Morgan Stanley Investment Management:
“What I find fascinating is despite a hawkish tone from today’s Fed announcement, the S&P barely went negative. The reason is that retail and institutional assets remain drastically offsides and are looking for any pullback as an opportunity to increase exposure.”
- Chris Zaccarelli at Independent Advisor Alliance:
“The Fed is saying that they are going to continue to fight inflation by raising interest rates at future meetings, but what the market hears is that the Fed is close to stopping interest rate hikes and it’s time to put cash to work.”
Key events this week:
- China property prices, retail sales, industrial production, Thursday
- European Central Bank President Christine Lagarde holds press conference following the rate decision, Thursday
- US initial jobless claims, retail sales, empire manufacturing, business inventories, industrial production, Thursday
- Bank of Japan rate decision, Friday
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 4 p.m. New York time
- The Nasdaq 100 rose 0.7%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World index rose 0.2%
Currencies
- The Bloomberg Dollar Spot Index fell 0.2%
- The euro rose 0.3% to $1.0825
- The British pound rose 0.4% to $1.2659
- The Japanese yen rose 0.2% to 139.97 per dollar
Cryptocurrencies
- Bitcoin was little changed at $25,869.47
- Ether fell 0.6% to $1,728.33
Bonds
- The yield on 10-year Treasuries declined one basis point to 3.80%
- Germany’s 10-year yield advanced three basis points to 2.45%
- Britain’s 10-year yield declined four basis points to 4.39%
Commodities
- West Texas Intermediate crude fell 0.9% to $68.79 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Tassia Sipahutar, John Viljoen, Vildana Hajric, Carly Wanna, Isabelle Lee, Emily Graffeo and Sophie Caronello.
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