Dizzying Pre-Fed Day Ends With Gains for Stocks: Markets Wrap

(Bloomberg) -- Stocks faced another volatile session, with traders awaiting more clues on whether the Federal Reserve will be able to pull off a soft landing that brings down inflation without triggering a recession.

After several twists and turns, the S&P 500 closed higher, led by gains in economically sensitive shares like commodity producers and banks. Small caps also climbed, while technology companies underperformed. Treasury 10-year yields stabilized amid speculation that the worst of the bond-market selloff may be over even though the Fed's monetary-policy tightening is only just getting underway. The dollar fell.

Markets have whipsawed amid concerns about persistent inflationary spirals and risks to global growth from rising yields. Fed Chair Jerome Powell and his colleagues are expected to raise rates by 50 basis points Wednesday and signal they're on track to lift them to around 2.5% by the end of the year. It's not clear, though, if that'll be enough to tame inflation, which is running above the central bank's target.

The Fed will have to boost rates to as much as 5% just as the world faces a “perfect storm” of potential recessions in the U.S., European Union and China, former International Monetary Fund chief economist Kenneth Rogoff said. Bond markets will continue to face pressures from inflation and tighter monetary policy, making stocks a better bet during this stage of the economic cycle, Pacific Investment Management Co. noted in its May asset-allocation outlook.

Comments:

“The 50-basis-point hike is baked in the cake. We see less than 10% chance of a 75-basis point hike,” said Leo Grohowski, chief investment officer for BNY Mellon Wealth Management, adding that traders will be closely watching any clues from Powell on “whether or not 75 basis points could be in the cards for the June meeting.”
“Because the market has priced in a 50-basis-point rate hike at the Federal Reserve's May meeting, the focus will immediately shift to just how many half-point hikes the Fed expects to initiate over the balance of 2022,” wrote Danielle DiMartino Booth, chief executive officer of Quill Intelligence. “Powell's greatest folly would be to insist that the economy is very strong in the face of overwhelming evidence that it is slowing and slowing fast.”
“Clearly there's just a great deal of volatility,” said Mark Hamilton, chief investment officer at Hirtle Callaghan & Co. “The biggest risk possibly really going on into next year is this question of: ‘Does the Fed tighten at the same time as other forces are causing the economy to weaken, and does that lead to a recession?”'

After the close of regular trading:

Starbucks Corp. reported profit and comparable sales that missed analysts' estimates in its latest quarter, signaling that interim Chief Executive Officer Howard Schultz has a difficult road ahead of him as inflation and China's Covid measures hurt the coffee giant's performance.
Advanced Micro Devices Inc. gave a strong sales forecast for the current quarter, indicating that it continues to win in its most lucrative market: data-center chips.
Airbnb Inc. gave a forecast for revenue in the current quarter that easily surpassed Wall Street's estimates as the company sees “substantial demand” for travel heading into the busy summer season.
Lyft Inc. reported first-quarter revenue that beat analysts' estimates, but recorded fewer-than-expected riders.

Key events this week: