U.S. Stocks Drop As Fed Swaps No Longer Show 2023 Cuts: Markets Wrap

(Bloomberg) -- Stocks fell after the Federal Reserve signaled the possibility of resuming its interest-rate hikes after pausing its tightening cycle in June to assess economic conditions.

The S&P 500 halted a four-day winning run, while the Dow Jones Industrial Average lost 1%. Fed Chair Jerome Powell said that nearly all participants saw further hikes as appropriate and the full effects of tightening have yet to be felt. He noted that the process of getting inflation back to 2% has a long way to go.

Treasury two-year yields, which are more sensitive to imminent Fed moves, climbed nine basis points to 4.75%. The swap market no longer price in rate cuts for this year.

The decision left the benchmark federal funds rate in a target range of 5% to 5.25%. Fresh quarterly Fed forecasts showed borrowing costs rising to 5.6% by year end, according to the median projection, compared with 5.1% in the previous round of projections.

Reaction to Fed:

• Neil Dutta at Renaissance Macro Research:

“What the hell do you expect them to do? Unemployment is not rising as much as they thought. Inflation is still firm. Growth is strong and the momentum behind it is favorable.”

• Greg McBride at Bankrate:

“The Fed is taking a breather. But it will likely be very short-lived, with rate hikes potentially resuming as soon as July. For now, the Fed will use this time to take in more data on inflation, the health of the economy, and tightening credit conditions before deciding what comes next.”

• Jason Pride at Glenmede:

“No rate hike this month does not necessarily mean that the Fed is finished raising rates this cycle. It is more likely that today’s decision will prove to be a ‘skip’ ahead of another rate hike at the July meeting than a prolonged pause in the rate hike campaign.”

Even with a 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.”

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 fell 0.4% as of 2:37 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average fell 1.1%
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%
• The euro rose 0.3% to $1.0821
• The British pound rose 0.4% to $1.2658
• The Japanese yen rose 0.3% to 139.77 per dollar

Cryptocurrencies

• Bitcoin rose 0.2% to $25,905.52
• Ether fell 0.2% to $1,735.35

Bonds

• The yield on 10-year Treasuries declined two basis points to 3.80%
• Germany’s 10-year yield advanced three basis points to 2.45%
• Britain’s 10-year yield declined four basis points to 4.39%

Commodities

• West Texas Intermediate crude fell 1.6% to $68.34 a barrel
• Gold futures rose 0.2% to $1,962.20 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.

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.