Wall Street rallies as Fed delivers 75 bps rate hike

Wall Street rallies as Fed delivers 75 bps rate hike
Cons disc leads S&P sector gainers; energy sole loser
Gold gains; crude, bitcoin, dollar fall
U.S. 10-Year Treasury yield slides to ~3.30%

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U.S. STOCKS RALLY JUMP FED HIKE, BUT WILL IT LAST? (1610 EDT/2010 GMT)

Wall Street rallied on Wednesday after the Federal Reserve delivered a 75 basis point hike to interest rates, though the question remained whether policymakers can bring down the pace of inflation without throwing the economy into recession.

Ten of the 11 S&P 500 sectors rose, led by consumer discretionary (.SPLRCD) , while energy (.SPNY) was the sole declining sector.

Semiconductors (.SOX) , small caps (.RUT) and Dow transports

(.DJT) also gained, while growth stocks (.IGX) more than doubled the gains of value shares (.IVX) .

The rally’s breadth was strong, but whether it will last was unclear as the Fed’s sharp boost to rates already shows signs of slowing growth that could lead to a recession.

“It’s too much, too quick, too fast, too far,” said Stephen Massocca, senior vice president at Wedbush Securities. “A lot of this inflation in my view is being driven by energy prices and at some point oil stops going up.”

The Fed still needs to do more as policymakers’ projection of a terminal rate of 3.4% at year end is below the market’s pricing of future expectations, with an implied rate of 3.7%, said Mauricio Agudelo, head of fixed income at Homestead Funds, referring to the fight against inflation.

“They are still playing catch up at this point,” he said.

After a spike in market rates following the release last week of data showing a larger-than-expected 8.6% increase in the consumer price index for May, yields declined on Wednesday, especially at the short end.

The two-year (US2YT=RR) U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 20.9 basis points to 3.226%.

While results have been beating analysts’ estimates, earnings have been in decline. Earnings per share for the S&P 500 is now at 16.1x for the next 12 months, or 5.1% below the average since 2000, according to CFRA.

Here’s a snapshot of closing market prices:

(Herbert Lash)

FED FIRES OFF A 75 BPS SALVO (1415 EDT/1815 GMT)

The Federal Reserve raised its target interest rate by three-quarters of a percentage point on Wednesday to stem a disruptive surge in inflation as policymakers projected a slowing economy and rising unemployment in the months ahead.

The rate hike was the biggest by the U.S. central bank since 1994, and was delivered after recent data showed little progress in the Fed’s battle to tame inflation.

In terms of the market’s immediate reaction to the FOMC’s decision, in the 15 minutes or so from just prior to the release of the statement at 2 p.m. EDT (1800 GMT), to around now, the S&P 500 index (.SPX) has pared its gains.

As for sectors over this short period, every major group has weakened, with energy (.SPNY) taking the biggest hit.

Regarding the Fed, Brian Jacobsen, senior investment strategist at Allspring Global Investments, said, “The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down.”

Jacobsen added, “This isn’t a Volcker-moment for Powell given the magnitude of the hike, but he is like a Mini-Me version of Volcker with this move.”

Markets now await Fed Chair Powell’s press conference at 02:30 p.m. EDT.

Here is a snapshot of where markets stood recently on the day:

(Terence Gabriel, Chuck Mikolajczak)

THE 75 BPS CAMP GETS CROWDED (1225 EDT/1625 GMT)

Traders are almost fully pricing in a 75 basis point hike from the Fed on Wednesday, up from 8.2% a week ago, according to CME’s FedWatch Tool. Such a big hike, which would be the first increase of that size since 1994, would lift the Fed’s short-term target policy rate to a range of 1.5% to 1.75%.

Goldman Sachs (GS) is in that camp, and is not only expecting the Fed to hike 75 basis points on Wednesday, but also at its July FOMC meeting. Previously they had expected 50 basis point hikes at these two meetings, according to a Goldman Sachs Global Macro Research note on Tuesday.

In September, Goldman is expecting a 50 basis point increase vs. 25 basis points previously.

Goldman says its adjustments come in the wake of the most recent upside CPI surprise and additional gains in Michigan consumer survey’s measures of long-term inflation expectations. As a result, GS has raised their terminal rate forecast to 3.25%-3.5%.

Goldman has lowered its U.S. ²⁰²²⁄₂₀₂₃ Q4/Q4 GDP forecasts to 1.25%/1.5%, while raising their YE22/23 unemployment forecasts to 3.5%/3.7%.

The investment bank remains focused on recession risks saying “we still see a narrow path to a soft landing.”

(Terence Gabriel)

STOXX SNAPS SIX-DAY LOSING STREAK (1148 EDT/1548 GMT)

European shares posted their best day in one month as measures announced by the European Central Bank to temper a bond market rout brought a broad sense of relief to investors across the region.

The pan-regional STOXX 600 (.STOXX) equity benchmark gained 1.5% following six straight sessions of losses - the longest losing streak so far this year - during which it lost more than 8%.

Here’s your snapshot.

(Danilo Masoni)

OIL, GAS MARKETS STUCK BETWEEN A ROCK AND A HARD PLACE (1130

EDT/1530 GMT)

Central banks, politicians and commuters are unlikely to see a respite from high energy costs as the outlook for oil and gas markets points to elevated prices for the foreseeable future, according to Ole Hansen, head of commodity strategy at Saxo Bank.

Struggles to find enough supply to meet rising demand and increased competition for gas will underpin already elevated prices in Europe and Asia, Hansen told the Reuters Global Markets Forum.

Hansen believes U.S. President Joe Biden’s “begging for barrels” on his trip to Saudi Arabia next month will likely yield verbal support but no additional barrels, given uncertainties about spare capacity levels.

“In other words, we are stuck between a rock and a hard place with a sharp deterioration in global growth needed in order to balance the market through reduced demand,” he said.

The International Energy Agency said world oil demand will rise over 2% to a record high of 101.6 million barrels per day in 2023.

Demand recovery and supply constraints due to sanctions on Russia and cautious production increases by OPEC+ pushed oil prices over $139 a barrel in March, the highest since 2008. Brent crude (LCOc1) is trading at around $120 today.

After coming close to touching a record high in March, spot gold (XAU=) has declined in the last few months but could hit a fresh all-time high this year, according to Hansen.

However, like most of the market, gold’s response today depends on the Fed.

“Breaking lower will basically be dependent on the market ‘buying’ the FOMC’s ability to control inflation through aggressive hikes, before it has a negative impact on growth,” he said.

“We doubt they will be successful in that quest, but if the market as a whole believes they can pull it off, we may see lower prices in the short-term.”

(Nishara Karuvalli Pathikkal)

FED DAY DATA EXTRAVAGANZA: RETAIL SALES, ET AL (1110 EDT/1510 GMT)

A data buffet on Wednesday provided a broad range to choose from for investors seeking distraction from the elephant in the room, namely the “will they/won’t they” 75 basis point interest rate hike from Powell & Co to be revealed later in the session.

Receipts at U.S. retailers (USRSL=ECI) unexpectedly decreased by 0.3% in May, reversing April’s 0.7% growth and defying analyst expectations for a modest 0.2% gain.

Low auto inventory and higher gasoline and food prices were mostly to blame. A 4% jump in spending at the gas pump was offset by a 3.5% drop in autos/parts. Excluding those items, retail sales inched up by a nominal 0.1%.

“The May data are signaling some loss in momentum in goods spending,” writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “Consumer response to high inflation and a swift move up in interest rates going forward is important and will determine the trajectory of growth over coming months.”

As many are forced to spend more on essentials even as real wage growth is on the decline, the American consumer - who contributes about 70% of the U.S. economy - is being forced to dip into their savings, run up their credit card balances, and cut back on discretionary spending.

Some economists fear this state of affairs, combined with increasingly aggressive Fed tightening, could tip the economy into recession.

So-called “core” retail sales, which strips out building materials, autos/parts, gasoline and food services - and is most closely associated with the consumer spending element of GDP - were unchanged from the prior month’s downwardly adjusted 0.5% growth.

The New York Federal Reserve had some somber news of its own, in the form of its Empire State manufacturing index

(USEMPM=ECI) , which came in at -1.20, failing to claw its way out of negative territory.

An Empire State/Philly Fed number below zero signifies a monthly contraction in manufacturing activity.

But Ian Shepherdson, chief economist at Pantheon Macroeconomics sees good news concealed behind the bad:

“The Empire State reports a rebound in orders and employment, and further declines in delivery times and order backlogs; the latter are now back to normal,” he writes. “On the face of it … this is a better survey than the low headline print.”

The Philly Fed is expected to have its say on Thursday, rounding out the East Coast manufacturing landscape. Economists predict a modest acceleration of activity.

On the bright side, the cost of goods and services imported from abroad (USIMP=ECI) was cooler than expected, rising 0.6% compared with the 1.1% gain expected, while the prices fetched by U.S. exports leapt an impressive 2.8%, largely a reflection of the strengthening dollar (USD=) .

On an annual basis, import prices - while remaining the hottest indicator by far - added further proof that inflation peaked in March, easing to 11.7% year-on-year.

That’s good news, but as seen in the graphic below, inflation is still well above the Fed’s average annual 2% target, and it’s skiing the bunny slope to the bottom.

Pivoting to the housing sector, the mood amongst homebuilders has dimmed this month.

The National Association of Homebuilders (NAHB) Housing Market index (USNAHB=ECI) shed 2 points to deliver a reading of 67, the lowest level since June 2020 and marking index’s sixth straight monthly decline.

“The housing market faces both demand-side and supply-side challenges,” says NAHB chief economist Robert Dietz. “Residential construction material costs are up 19% year-over-year with cost increases for a variety of building inputs.”

“On the demand-side of the market, the increase for mortgage rates for the first half of 2022 has priced out a significant number of prospective home buyers, as reflected by the decline for the traffic measure of the HMI.”

Indeed, the perfect storm of sky-rocketing home prices and rising loan costs is pushing many perspective homebuyers out of the market.

“The entry-level market has been particularly affected by declines for housing affordability and builders are adopting a more cautious stance as demand softens with higher mortgage rates,” writes NAHB chairman Jerry Konter.

Speaking of which, despite a surge in interest rates mortgage demand counterintuitively jumped by 6.6% last week, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate (USMG=ECI) jumped 25 basis points to 5.65%, the highest its been since late 2008.

“Mortgage rates increased for all loan types,” says Joel Kan, associate vice president of economic and industry forecasting at MBA. “Mortgage rates followed Treasury yields up in response to higher-than-expected inflation and anticipation that the Federal Reserve will need to raise rates at a faster pace.”

Even so, applications for loans to purchase homes

(USMGPI=ECI) and refinance existing mortgages (USMGR=ECI) increased by 8.1% and 3.7%, respectively.

But overall mortgage demand remains on a downward trend, and currently sits 54.3% below the same week last year:

Finally, the value of goods in the store rooms of U.S. businesses (USBINV=ECI) cooperated with consensus by increasing 1.2% in April, half the pace of March’s monthly growth.

Despite the deceleration, the data has been in the plus column now for 12 consecutive months, which bodes well for second-quarter GDP.

As seen in the graphic below, the private inventories element of GDP was an economic detractor in the first three months of 2022:

Wall Street was in solid positive territory in late morning trading with every sector but energy wearing green.

Economically sensitive transports (.DJT) were ahead of the pack.

(Stephen Culp)

WALL STREET RALLIES BEFORE FED’S RATE DECISION (1002 EDT/1402 GMT

Wall Street is jumping on Wednesday, hours before the Federal Reserve is expected to deliver the biggest U.S. interest rate hike in decades, with nearly all S&P 500 sectors solidly in the green.

Fed watchers expect a 75 basis point hike, the first of such size since 1994. The Fed also will release at 2 p.m. (1800 GMT) updated projections for economic growth, inflation, unemployment and rates for the next several years, with a summary expected to show rates rising above 3% by year end.

Financials (.SPSY) and real estate (.SPLRCR) are fighting for leadership, up almost 2% each, while energy (.SPNY) , the sole losing sector, is off 0.6%.

The Dow transports (.DJT) , small caps (.RUT) and semiconductors (.SOX) are advancing, and growth (.IGX) is outpacing value (.IVX) .

Wednesday data suggested a slight decline in inflation as U.S. retail sales unexpectedly fell in May, the first drop in sales in five months that suggested high inflation was starting to hurt demand as consumers rotate spending from goods to services.

Retail sales dropped 0.3% last month, the Commerce Department said. Data for April was revised lower to show sales increasing 0.7% instead of 0.9% as previously reported.

Other data showed U.S. import prices increased 0.6% last month from 0.4% in April amid higher prices for petroleum products. Excluding fuel and food, import prices dropped 0.3%.

Here’s a snapshot of early market prices:

(Herbert Lash)

ECB: GIVE US THE DETAILS! (0900 EDT/1300 GMT)

It looks like a sell the news reaction to the outcome of today’s unscheduled ECB meeting, with euro bank stocks, bonds and the euro all trimming gains after the central bank promised to design a new tool to support indebted members.

Some expectations were running too high before the meeting and those anticipating a “whatever-it-takes” moment were disappointed. The lack of detail was another clear downer.

The ECB said it will be flexible in reinvesting cash maturing from its recently-ended 1.7 trillion euro pandemic support scheme and would consider a fresh instrument to be devised by staff.

“The response is not optimal but it is a first response,” says Saltmarsh Economics economist Marchel Alexandrovich.

“In circumstances like this, it would be good to know how much are they going to deviate from the capital key when it comes to reinvestments… They also refer to a new tool and that implies a dedicated programme. That is more interesting but it is short of detail,” he adds.

Below you can see Italian 10-year bond yields (IT10YT=RR) coming off lows following news from the central bank.

(Danilo Masoni)

S&P 500 INDEX: CHILL IN THE AIR (0900 EDT/1300 GMT)

Ahead of the statement from the highly anticipated FOMC meeting at 2 p.m. EDT on Wednesday, where investors have dramatically raised their bets for a 75 basis points rate hike, the S&P 500 index (.SPX) ended Tuesday down 22.1% on a closing basis from its early-January record high.

With this, the percentage of S&P 500 companies trading above their 50-day moving average (DMA) has collapsed to its lowest level since April 1, 2020, which was just shortly after the pandemic-crash low:

It’s been an especially rough week or so for the benchmark index. Just since June 7, the SPX is down five-straight days, while losing just over 10% of its value.

Over this period the percentage of S&P 500 companies above their 50-day moving average has collapsed from about 47% to 5%. On Monday, this measure hit a low of 4.55%. It has since ticked up just slightly.

It now remains to be seen if this is a sufficiently cold reading which can set the S&P 500 up for a surprise reversal over coming days.

Of note, during the pandemic-crash, the reading bottomed on March 12 at 1.2%. March 12 was seven trading days ahead of SPX’s low close and intraday low for that 34% decline.

During the late-2018 market swoon, the reading bottomed at 0.6% on Dec. 24, the day of the SPX’s low close, and one day ahead of the intraday low for that 20% decline.

Meanwhile, the percentage of S&P 500 stocks above their 200-day moving average has now fallen to about 15% - click here: