Stocks rose amid market expectations that the Federal Reserve will keep its interest rates steady for the first time in 15 months to evaluate whether or not further tightening is needed.
(Bloomberg) — Stocks rose amid market expectations that the Federal Reserve will keep its interest rates steady for the first time in 15 months to evaluate whether or not further tightening is needed.
If the S&P 500 is able to sustain its fifth straight gain, the gauge will notch the longest winning run since November 2021. The advance drove the index closer to the 4,400 mark. The Dow Jones Industrial Average underperformed as a warning from UnitedHealth Group Inc. sent the shares tumbling 7%. A measure of megacaps like Apple Inc. and Microsoft Corp. climbed 1%. Tesla Inc. whipsawed after posting a record up streak.
“Market momentum is higher,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “If the Fed meets expectations and pauses and signals the possibility of one more rate hike in 2023, it’ll enable momentum to stay higher.”
Bonds reversed course Wednesday, with yields dropping across the curve, after another inflation reading showed signs of cooling. Two-year rates slipped five basis points to 4.6%. The dollar fell to a one-month low. The swap market shows traders now expect the Fed benchmark to peak in September, instead of July.
While policymakers are poised to pause their rate hikes, they’re expected to retain a tightening bias that signals a possible resumption of moves if warranted. The Federal Open Market Committee decision and economic forecasts — the “dot plot” — will be released at 2 p.m. in Washington. Chair Jerome Powell will hold a press conference 30 minutes later.
‘Tipped Their Hand’
Back in May, Powell gave a clear signal he was inclined to pause interest-rate increases this month, taking command of the policy debate after several officials suggested they wanted to keep hiking.
“The Fed has already tipped their hand – they aren’t going to raise rates today – but they are going to find it increasingly difficult to raise rates for the rest of this year, even though inflation is much too high,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “As a result, we are stuck in no-man’s land where inflation is above target, monetary policy is tight and employers hoard labor.”
As long as that dynamic persists, there won’t be a recession, “but ultimately something has to give,” he noted.
Ian Lyngen at BMO Capital Markets says he’ll be on the lookout for any comments from Powell regarding the recent breakout in the US equity benchmark that reached its highest level since April 2022. Back in December, the Fed Chair highlighted the importance of financial conditions continuing to reflect the policy restraints put in place to tame inflation.
“A skip is NOT likely an all-clear sign that the Fed is done and that any easing is imminent,” wrote Brian Rauscher, head of global portfolio strategy at Fundstrat. “The odds for the next Fed action still favors a hike and that the central bank is still a long way away from being able to declare victory over inflation.”
The last increase in borrowing costs since the 1950s has typically been bearish for stocks six months later, but not since former Fed Chair Alan Greenspan was at the helm of the central bank.
Since the 1950s, the S&P 500 declined a median of 5.5% six months after the last rate hike, according to data compiled by Ned Davis Research. But in recent decades it’s been bullish for stocks, with the benchmark equities gauge climbing more than 10% six months later in four of the past five final rate hikes.
Catching Up
“Is the stock market simply catching up to what normally happens?” said Neil Dutta at Renaissance Macro Research. “Typically, the market tends to continue rallying in the first year of a tightening cycle. That did not happen this time as the Fed aggressively hiked the federal funds rate. With the Fed starting to back off, I wonder if the market is simply catching up to normal.”
Two years after a hiking cycle starts, stock prices are historically up about 20%, Dutta noted.
Even with an expected pause in Fed hikes and an artificial intelligence boom that helped drive the S&P 500 into a bull market, there’s more pain ahead for stocks, according to Morgan Stanley’s Mike Wilson.
He reiterated his year-end price target of 3,900 for the gauge, which implies an 11% drop from Tuesday’s close.
“Our view is that inflation is going to come down, and while that potentially is very good for bonds, it’s not going to be good for stocks because that’s where the earnings power is coming from — this is really our boom-bust thesis.”
In other corporate news, Advanced Micro Devices Inc. gained after the chipmaker showed off its planned line of artificial intelligence processors. Charles Schwab Corp. said it expects its revenue to slide as much as 11% in the second quarter.
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 rose 0.4% as of 11:45 a.m. New York time
- The Nasdaq 100 rose 0.6%
- The Dow Jones Industrial Average fell 0.3%
- The Stoxx Europe 600 rose 0.4%
- The MSCI World index rose 0.5%
Currencies
- The Bloomberg Dollar Spot Index fell 0.5%
- The euro rose 0.6% to $1.0857
- The British pound rose 0.7% to $1.2696
- The Japanese yen rose 0.6% to 139.32 per dollar
Cryptocurrencies
- Bitcoin rose 0.5% to $25,968.44
- Ether was little changed at $1,739.78
Bonds
- The yield on 10-year Treasuries declined three basis points to 3.78%
- Germany’s 10-year yield advanced two basis points to 2.45%
- Britain’s 10-year yield declined five basis points to 4.39%
Commodities
- West Texas Intermediate crude fell 0.8% to $68.87 a barrel
- Gold futures rose 0.6% to $1,970.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Tassia Sipahutar, John Viljoen, Vildana Hajric, Carly Wanna and Isabelle Lee.
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