Reuters Market Analyst, Terence Gabriel, Reuters, London Southeast
Main U.S. indexes advance: Nasdaq out front
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KBW regional banking index rallies >2%
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Dollar, bitcoin decline; gold rises; crude slides >4%
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U.S. 10-Year Treasury yield falls to ~3.40%
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FED FIRES OFF A 25BP HIKE, U.S. STOCKS TAKE IT IN STRIDE (1421 EDT/1821 GMT)
The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point and signaled it may pause further increases, giving officials time to assess the fallout from recent bank failures, wait on the resolution of a political stand-off over the U.S. debt ceiling and monitor the course of inflation.
The main indexes are higher on the day, and have strengthened since the statement came out.
However, regional banks have given back some gains. The KRX was up more than 3%, but it is now up just over 2%.
According to the CME’s FedWatch Tool, the chance of the Fed now leaving rates unchanged at their June 13-14 policy meeting is about 87%. There is about an 8% chance they reduce rates by 25bps, and about a 6% chance they hike another 25bps.
Regarding the FOMC’s actions, Brian Jacobsen, chief economist at Annex Wealth Management, said, “When having to choose between hawk and dove, the FOMC opted for chicken instead. There isn’t a credit crunch, but there are credit cracks.”
Jacobsen added “Manufacturing and housing have been in a recession already. Services is set to slow. This move is consistent with our “slow-flation” theme where we think we will see sub-par growth and inflation only gradually returning to 2%. Gradual is good enough when it comes to inflation. A pause, however, isn’t good enough though to avert at least a mild recession.”
Markets now await Fed Chair Powell’s press conference at 230 PM EDT.
Here is a snapshot of where markets stood around 20 minutes after the release of the Fed’s statement:
(Terence Gabriel, Chuck Mikolajczak)
RATES, REGIONALS AND RECESSION: SOME CONTEXT AROUND FED POLICY (1215 EDT/1615 GMT)
According to the CME’s FedWatch Tool, there is an 87% chance that the FOMC raises rates 25 basis points with the release of their statement at 2 PM EDT (1800 GMT) on Wednesday. There is about a 13% chance that the Fed sits on its hands.
In any event, how long does the Federal Open Market Committee typically holds rates at a high level once a tightening cycle is over?
Nicholas Colas, co-founder of DataTrek Research, has looked back to 1954 and he says that fed funds were quite volatile from the start of this time series to the mid 1990s.
“There was a longish period of relatively stable rates from 1995 to 2000, another year-long run in 2006 – 2007, and six months in 2019. That’s it, however. Fed funds usually either go up or go down. Stasis is rare,” writes Colas.
According to Colas, while it may seem strange that Fed Funds are predicting a quick Fed pivot to an easing cycle later this year, the long run history of policy rates supports this view.
He also argues that the same history also challenges the publicly stated Fed SEP consensus that rates will remain at 5.00%-5.25% through year end before ratcheting down to 4.25%–4.50% in 2024.
“Over the last seven decades, such periods of stability are much more the exception than the rule.”
Meanwhile, Colas is also taking note of a number of concerns including: the ongoing debt ceiling debate, the regional banking crisis, and recession fears.
His main takeaway here is that “the Fed rarely cuts interest rates when equity market volatility is low, so we likely need stock vol to pick up before the FOMC pivots. Perhaps the seeds of that eventual sell-off are being planted right now with the concerns we’ve listed above.”
(Terence Gabriel)
FED DAY DATA: ADP, SERVICES PMI, MORTGAGE DEMAND (1101 ET/1501 GMT)
Investors began Fed day with a data triple-play packed with surprises large and small and they barely noticed, choosing to focus instead on the climactic moment of the two-day Fed conclave, awaiting the white smoke of another expected rate hike.
Private U.S. employers added a super-sized 296,000 workers to their rosters last month, exactly double the 148,000 consensus, according to payroll processor ADP.
The lofty print marks a 108.5% increase over March, and lands 136,000 above of the 160,000 private payroll adds analysts expect the Labor Department’s more comprehensive jobs report to show on Friday.
It should be noted, of course, that ADP is not a reliable predictor of official private payrolls, as illustrated below.
In fact, as Ian Shepherdson, chief economist at Pantheon Macroeconomics puts it, ADP might be making up for recent shortfalls.
“ADP has understated the official payroll numbers in six of the past eight months,” Shepherdson writes. “The run of undershoots has to come to an end sooner or later.”
“The unexpectedly big April number, then, might just mark the start of the catch-up,” he adds.
Even so, any evidence of lingering tightness in the labor market, which puts upward pressure on wage growth – a major inflation driver – is unlikely to turn hawks into doves.
A separate report showed the U.S. services sector modestly accelerated its expansion in April.
The Institute for Supply Management’s (ISM) non-manufacturing purchasing managers’ index (PMI) delivered a reading of 51.9, coming in a hair above expectations and inching further north of the magic level of 50, the dividing line between monthly contraction or expansion.
Digging deeper into the report, new orders jumped 3.9 points to 56.1, inventories dipped into contraction at 47.2, employment lost momentum, while prices paid – an inflation harbinger – gained some heat.
“There has been a slight uptick in the rate of growth for the services sector, due mostly to the increase in new orders and ongoing improvements in both capacity and supply logistics,” writes Anthony Nieves, chair of ISM’s services business survey committee. “The majority of respondents are mostly positive about business conditions; however, some respondents are wary of potential headwinds associated with inflation and an economic slowdown.”
S&P Global also had its say, releasing a services PMI number of 53.6, just a hair lower than its initial “flash” 53.7 take released a couple weeks ago.
“April saw an encouraging acceleration of service sector growth which … suggests the economy has regained some momentum at the start of the second quarter,” says Chris Williamson, chief business economist at S&P Global. “However, there are indications that resurgent demand for services is reigniting inflationary pressures.”
“Average rates charged for services are now rising at the sharpest rate for eight months.”
Here’s how the dueling PMIs compare:
Finally, demand for home loans slipped 1.2% last week despite a dip in mortgage rates, according to the Mortgage Bankers Association (MBA).
The average 30-year fixed contract rate shed 5 basis points to 6.50%.
While this encouraged a modest 0.8% increase in refi demand , applications for loans to purchase homes dropped 2%.
That drop might have something to do with persistently low inventories of pre-owned homes on the market.
Recent data shows sales and pending sales of existing homes falling but new home sales on the rise.
Home price growth is coming down to earth, homebuilder sentiment is ticking higher, and mortgage rates are down 66 basis points from its October zenith.
“Home purchase activity has been very sensitive to rates and local market trends, including the very low supply of existing-home inventory,” says Joel Kan, MBA’s deputy chief economist. “However, newly constructed homes account for a growing share of inventory, giving more options for prospective buyers.”
That said, overall mortgage demand is down 39.1% from the same week last year:
Wall Street is mixed in morning trading, with minimal motivation to make any rash moves ahead of the Fed.
Growth stocks have a slight edge over value, putting the Nasdaq in green territory.
(Stephen Culp)
WALL STREET RALLIES AHEAD OF FOMC POLICY STATEMENT (1010 ET/1410 GMT)
Stocks on Wall Street are edging higher in early trade on the belief that the Federal Reserve, regardless of its statement later on Wednesday, is poised to pause and then cut interest rates on concerns a credit crunch will lead to a recession.
A majority of the 11 S&P 500 sectors are higher, led by industrials, while energy is taking the biggest hit.
The Dow Transports, and small caps are gaining, while regional banks are snapping back more than 2%. Chip stocks are lower.
Data showed the U.S. services sector grew at steady pace in April as new orders increased amid a surge in exports, but businesses continued to face higher prices for inputs, indicating that inflation could remain elevated for some time.
The Institute for Supply Management (ISM) said that its non-manufacturing PMI edged up to a reading of 51.9 last month from 51.2 in March. Economists polled by Reuters had forecast the non-manufacturing PMI would tick up to 51.8.
The market has a strong belief that the Fed is going to pause and will be forced to quickly pivot from rate hikes to rate cuts, says Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York.
Recent price data suggests inflation is proving to be sticky as it decelerates, which should imply a “higher for longer” policy response from the Fed. But markets are fixated on the view that a systemic credit issue is lurking, Ricchiuto said.
“This policy pivot call is central to relatively expensive valuations in bonds and stocks as well as the U.S. dollar,” he said in a note on Wednesday.
As for the Fed’s statement and press conference later, Chair Powell “is going to try to present a balanced view because he has a divided committee. So, therefore you’re going to find whatever you want and the bulls are going to run with it.”
Below is a snapshot of early market prices:
(Herbert Lash)
DOW INDUSTRIALS: LEVELING UP AHEAD OF THE FED (0900 EDT/1300 GMT)
Ahead of the results of Wednesday’s highly anticipated Fed meeting, the Dow Jones Industrial Average has become increasingly volatile:
Last Wednesday, daily volatility close-to-close ended at its lowest level since the DJI’s Jan. 4, 2022 record-high finish. This indicator ended Tuesday at a one-month high.
For nearly three weeks now, the Dow has been oscillating around trendline resistance from its Jan. 5, 2022 record intraday high. With its 33,684 Tuesday close, the DJI ended back below this line, which should reside just shy of 33,800 on Wednesday.
In the wake of April ADP private employment coming in well above estimates, e-mini Dow futures are suggesting the DJI is poised to edge up at the open. Thus, the line will present a hurdle in early trade.
In any event, traders are braced for the potential for even greater volatility as the market ultimately digests the results of the Fed meeting and chair-Powell’s press conference.
On strength above the resistance line, Monday’s high was at 34,258, and just above here are the January-February highs packed in a tight range at 34,331, 34,335 and 34,342. The December 13 high was at 34,712.
On a break below last Wednesday’s 33,235 low, the 50-day moving average (DMA) ended Tuesday around 33,065. The 200-DMA ended around 32,685.
Meanwhile, both the S&P 500 and Nasdaq Composite are also just shy of key chart hurdles.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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