The stock market got little encouragement to sustain its rebound after the Federal Reserve signaled that interest rates will continue moving higher amid ongoing inflation concerns.
(Bloomberg) — The stock market got little encouragement to sustain its rebound after the Federal Reserve signaled that interest rates will continue moving higher amid ongoing inflation concerns.
It’s not like the minutes from the latest Fed gathering brought a great deal of new information, but they reinforced the idea that nothing will prevent officials from keeping rates higher for longer should economic resilience pose a threat to their goals. Now one thing to highlight is that while Chair Jerome Powell hasn’t been pushing back against easier financial conditions, the statement indicated they could warrant a “tighter stance.”
That all suggests the Fed will be in no rush to cut rates.
And that perception continued to be reflected in the swap market. The rate on the overnight index contract linked to the June gathering rose as high as 5.33%, around 75 basis points above the current effective fed funds rate. With meetings in March, May and June, that could equate to a quarter-point move up at each gathering. The market also priced in a higher peak policy rate, with the July contract nearly reaching 5.4%.
After a series of twists and turns, the S&P 500 fell 0.2% — its fourth straight decline and the longest losing streak since December. The gauge has now erased more than half of this year’s rally. Treasury two-year yields, which are more sensitive to imminent rate moves, significantly pared declines after the Fed minutes. The dollar rose. In late trading, Nvidia Corp. surged on a bullish revenue outlook.
‘Bottom Line’
A number of officials said that an “insufficiently restrictive” policy stance could stall recent progress on moderating inflation pressures, according to the statement, suggesting they are prepared to move rates up further than their December forecast of 5.1%. The minutes also said “almost all” officials agreed it was appropriate to raise interest rates by 25 basis points at the meeting, while “a few” favored or could have supported a bigger 50 basis-point hike.
“Bottom line is that many market headwinds aren’t going away and investors should expect volatility to stay as they parse over the impact rates being higher for longer will have,” said Mike Loewengart at Morgan Stanley Global Investment Office.
In fact, another thing traders are taking note is the recent flare-up in equity volatility. And the reason is that after a lengthy subdued period, that may put the S&P 500’s rally to the test. The so-called VIX halted a two-day surge Wednesday — but held near its highest level of 2023.
“There was some huge upside call buying activity on the VIX in February as traders turned bearish on the resilience of the equity market,” said Aurel’s Gurmit Kapoor.
Short Selling
That’s a stark contrast to data at the end of last month that showed very few were betting against the rally. Shares out on loan, an indication of short-selling interest, stood just below 1% of the S&P 500’s median free float as of Jan. 31, according to figures compiled by S&P Global Market Intelligence.
Traders pinned hopes on the earnings season to push the S&P 500 somewhere out of a trading range it’s been stuck in for months.
Between JPMorgan Chase & Co.’s results that kicked off the announcement season and Walmart Inc.’s report Tuesday, the S&P 500 added 0.4%. This ties for the smallest earnings-season reaction in either direction since 2018, data compiled by Bloomberg show.
“After a strong start to the year driven by absolute and relative short covering by institutional investors, skepticism over the sustainability of the rally remains elevated, and bears are beginning to wrestle control from the bulls,” said Mark Hackett, chief of investment research at Nationwide. “While institutional investors have been net buyers this year, they remain conservatively positioned and quick to sell, while retail investors continue to aggressively buy equities.”
“This is a similar trend to what we saw through the second half of 2022,” he added.
As the Fed’s most-ambitious policy tightening in decades tests investors’ resolve toward equities, US companies are increasingly relying on buybacks to boost their market valuation.
Companies in the S&P 500 bought back at least $936 billion of shares in 2022, compared with the $565 billion they paid out as dividends, according to estimates by Howard Silverblatt at S&P Dow Jones Indices. That’s the highest amount of buybacks since the turn of the millennium.
Geopolitical tensions also simmered on the background.
US President Joe Biden said Russian President Vladimir Putin made a “big mistake” in suspending participation in the New START nuclear treaty, his first direct response to the announcement. Meantime, Putin said he’s waiting for his Chinese counterpart Xi Jinping to visit Russia as he hailed deepening ties with Beijing at talks with China’s top diplomat.
The US has warned China about providing Russia with weapons and other lethal aid for the invasion of Ukraine and is watching closely to ensure Beijing’s diplomatic and economic support to Moscow doesn’t go any further, State Department spokesman Ned Price said Wednesday.
Key events this week:
- Eurozone CPI, Thursday
- US GDP, initial jobless claims, Thursday
- Atlanta Fed President Raphael Bostic speaks, Thursday
- BOJ governor-nominee Kazuo Ueda appears before Japan’s lower house, Friday
- US PCE deflator, personal spending, new home sales, University of Michigan consumer sentiment, Friday
- Russia’s invasion of Ukraine hits the one-year mark, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.2% as of 4 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average fell 0.3%
- The MSCI World index fell 0.5%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.4% to $1.0603
- The British pound fell 0.6% to $1.2043
- The Japanese yen was little changed at 134.95 per dollar
Cryptocurrencies
- Bitcoin fell 1.5% to $23,826
- Ether fell 1.4% to $1,619.21
Bonds
- The yield on 10-year Treasuries declined three basis points to 3.92%
- Germany’s 10-year yield was little changed at 2.52%
- Britain’s 10-year yield declined one basis point to 3.60%
Commodities
- West Texas Intermediate crude fell 3.2% to $73.89 a barrel
- Gold futures fell 0.5% to $1,833.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Michael Msika and Vildana Hajric.
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