The Federal Reserve Decreases GDP Growth Expectations While Raising Inflation Forecast
Last Updated 4:30PM EST
Equities finished the day positive after the Federal Reserve announced that it is willing to remain aggressive in order to fight inflation. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 gained 1%, 1.46%, and 2.49%, respectively.
Investors weren’t feeling the energy sector today as it was the only one that finished negative. The best performing sector was consumer discretionary, which gained 2.81%.
The Federal Reserve also released its inflation and economic growth projections, which seem to be moving in undesirable directions. The central bank lowered its real GDP growth forecast from 2.8%, 2.2%, and 2% to 1.7%, 1.7%, and 1.9% for 2022, 2023, and 2024, respectively.
It also raised its expectation for inflation from 4.3% to 5.2% in 2022, although it cut its inflation projections by 0.1% in both 2023 and 2024. The Federal Reserve also expects the Federal Funds Rate to increase to 3.4% by the end of the year, which is substantially higher than its previous forecast of 1.9%
In reaction to the central bank, U.S. Treasuries rallied, causing yields to fall. The spread between the 10-Year and Two-Year U.S. Treasury yields had initially widened following the Fed’s announcement but has since narrowed again to 8 basis points.
Market Rallies after the Federal Reserve Hikes Rates by 75 Basis Points
Last Updated 3:30PM EST
Stocks are green following the Federal Reserve’s decision to raise the Fed Funds Rate by 75 basis points. As of 3:30 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 1.7%, 2.3%, and 3.4%, respectively.
The energy sector is still the worst performer, as it is down 1.6%. However, all other sectors are in the green, with the best performing sector, real estate, gaining 3.4%.
WTI crude oil continues its slide, as it now trades in the mid-$116 range, while the U.S. 10-Year Treasury yield also takes a breather from its recent rise, now hovering around 3.33%.
The spread between the 10-Year and Two-Year U.S. Treasury yields has widened following the Fed’s announcement and currently stands at 11 basis points, up from the mid-single digits seen earlier in the day.
Jerome Powell acknowledged that the 75 basis point hike was unusually large, but he does not believe that moves of this size will be common. The market seemed to like this acknowledgment.
The market also seemed to appreciate the fact that Powell is leaving the door open for another big rate hike if necessary, demonstrating that he is serious about inflation.
Mortgage Rates Hit Highest Level Since 2008
Last Updated 12:00PM EST
Stocks are green halfway into the trading session as investors await the Federal Reserve’s interest rate decision. As of 12:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 0.55%, 0.95%, and 1.64%, respectively.
The energy sector is still the laggard so far, as it is down almost 0.9%, while the best performing sector, consumer discretionary (XLY), is up almost 2%.
WTI crude oil is down 1.5% to $117.19, while the U.S. 10-Year Treasury yield is hovering around 3.4%. The spread between the 10-Year and Two-Year U.S. Treasury yields continues to narrow, as it currently sits at 5.4 basis points.
On Wednesday, the Mortgage Bankers Association released its weekly report for the U.S. 30-year mortgage rate. The mortgage rate increased to 5.65% from last week’s 5.4%, the highest it has been since December 2008.
Despite the higher rates, the number of mortgage applications increased week-over-week by 6.6%. This follows four straight weeks of mortgage application declines, indicating that homebuyers may be trying to lock in the current rates before the Federal Reserve pushes them higher with more aggressive rate hikes.
Nevertheless, mortgage application volume is down substantially on a year-over-year basis, with the Mortgage Market Index at 307.8 compared to 672.4 in June 2021.
Stocks Rise as Retail Sales Miss Expectations
Last Updated 10:00AM EST
Stocks are green after the first 30 minutes of trading. As of 10:00 a.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 1.2%, 1.3%, and 1.6%, respectively.
The energy sector (XLE) is the laggard so far, as it is down almost 0.2%. However, all other sectors are in the green, with the best performing sector, real estate (XLRE), gaining 2%.
WTI crude oil is down only slightly to the mid-$118 range, while the U.S. 10-Year Treasury yield pulled back to 3.38%. The spread between the 10-Year and Two-Year U.S. Treasury yields currently sits at 6 basis points, as it is very close to inverting.
On Wednesday, the Census Bureau released its month-over-month U.S. Retail Sales report, which measures the change in the total value of retail sales. In May, retail sales fell 0.3%, below the expected 0.2%. This was primarily due to a decline in vehicle sales, as high prices, rising financing costs, and inventory shortages are softening demand.
Nevertheless, Core Retail Sales, which excludes automobiles, increased 0.5% month-over-month. However, this is below the 0.8% that was forecast and is mainly attributable to rising gasoline prices. Indeed, when excluding gasoline, core retail spending only increased by 0.1%.
This highlights how consumers are being forced to allocate more of their spending towards essential items, further feeding the narrative that a possible recession may be on the way.
Pre-Market Update
Stock futures were moved slightly northward early Wednesday morning, as investors rely on the Federal Reserve’s monetary policy to tame the raging inflation.
Futures on the Dow Jones Industrial Average (DJIA) moved 0.66% higher, while those on the S&P 500 (SPX) climbed 0.76%, as of 4:36 a.m. EST, Wednesday. Meanwhile, the Nasdaq 100 (NDX) futures advanced by 0.81%.
The Federal Reserve is scheduled to announce a fresh interest rate hike later on Wednesday, after concluding its two-day meeting. Notably, CME Group’s FedWatch tool found out that 95% of the market expects a 75-basis-point increase in interest rates, which incidentally will be the biggest since 1994, if true.
Last week, the consumer price index showed us that prices were at a new 40-year-high of 8.6% in May. Moreover, the wholesale price index, which measures the prices that suppliers are buying at, also increased 0.8% in May, following a 0.4% rise in April.
A slump in economic outlook, combined with higher-than-expected inflation in May spurred the Fed to contemplate a more aggressive policy in order to effectively curb inflation.
At the end of the regular trading hours of Tuesday, the S&P 500 slipped further into bear market territory, having shed 0.38%. While the Dow declined 0.5%, the Nasdaq 100 gained 0.21%, possibly after ace investor Cathie Wood mentioned that the market is close to a trough and that she expects the tech sector to recover first, after the bloodshed is over.
Nonetheless, markets have remained unpredictable and volatile for a long time now, and most investors have lost the confidence to continue buying the dip. On Monday, according to FactSet, the S&P 500 traded at 15.8 times its earnings estimate for the next 12 months, which is still higher than the 15-year average of 15.7. Speculators and optimists alike are expecting the market’s valuation to fall even further before investors start buying again and a rebound sets in.
Meanwhile, the two-year Treasury yield climbed 40 basis points this week. The benchmark 10-year yield, on the other hand, crossed 3.48%, an 11-year-high.
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