Seemingly mixed messages from the Fed whipsawed stocks yesterday, and look to extend declines again Thursday as traders re-set rate hike forecasts in the wake of Chair Powell’s hawkish press conference.
Updated at 8:48 am EST
U.S. equity futures moved lower again Thursday, extending declines from last night’s post Fed-decision trading on Wall Street that included a 1,000 point swing for the Dow, as investors reacted to new market forecasts on the ultimate level of benchmark interest rates and change in focus for the central bank’s inflation fight.
Federal Reserve Chairman Jerome Powell quickly snuffed-out an early afternoon rally yesterday, triggered by changes in the statement that followed the central bank’s 75 basis points rate hike — the fourth in succession — which suggested it would consider the “lagging” impact of previous increases on the broader economy before making its next decision.
Powell’s question-and-answer session with the media soon after, however, put that statement, and the Fed’s broader rate hike strategy, into an investment context and essentially rejected the idea of a near-term ‘pivot’.
“When they hear lags, they think about a pause,” Powell said. “It’s very premature, in my view, to think about or be talking about pausing our rate hike.”
“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus,” he added.
He also indicated that while smaller rate hikes in the coming months could be warranted, the ultimate level of the benchmark Fed Funds rate will be higher than he and his colleagues had estimated. As a result, traders are now expecting a 50 basis point rate hike in December, with a terminal Fed Funds rate of between 5% and 5.25% by next spring.
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“Powell made it clear that his bias is to err on the side of over-tightening rather than under-tightening in order to avoid the risk of inflation becoming entrenched,” said Yung-Yu Ma, Chief Investment Strategist at BMO Wealth Management.
“At the end of the day, it’s going to come down to inflation and labor market data in the coming months and quarters,” he added. “The Fed’s outlook may be less one-sided, but reaffirming its bias to fight hard against inflation is likely to remain a market headwind.”
To that end, the U.S. dollar index was marked 1.43% higher against its global peers in overnight trading, and changing hands at 112.935, while benchmark 10-year note yields surged to 4.191% and 2-year note yields rose to 4.71% in anticipation of the higher Fed Funds rate.
Stocks around the world reacted in kind, with Asia’s MSCI ex-Japan index falling 1.97% into the close of trading — thanks in part to Beijing’s reiteration of its ‘zero Covid’ policies while Europe’s Stoxx 600 fell 1.34%.
Britain’s FTSE 100 was marked 0.8% lower after a mid-day policy decision from the Bank of England, which lifted its benchmark lending rate by 75 basis points — the most since 1989 — to 3% as it steps-up its fight against the fastest inflation in forty years.
Heading into the start of the trading day on Wall Street, futures contracts tied to the S&P 500 are priced for a 39 point opening bell pullback while those linked to the Dow Jones Industrial Average are priced for a 340 point decline following last night’s 505 point slump. The tech-focused Nasdaq is priced for a 140 point slide.
Moderna (MRNA) – Get Moderna Inc. Report shares were a notable early mover, falling nearly 11% after the drugmaker posted stronger-than-expected third quarter earnings but lowered its near-term forecast for vaccine revenues amid supply-chain bottlenecks that will defer some sales into next year.
Roku (ROKU) – Get Roku Inc. Report shares plunged 20% after the streaming service hub warned the holiday ad spending will likely prove sharply lower than last year’s levels, clouding a solid third quarter update.
eBay (EBAY) – Get eBay Inc. Report gained 6.15% after the online marketplace posted better-than-expected third quarter earnings and boosted its holiday sales forecast amid a renewed focus on value-focused customers.
Qualcomm (QCOM) – Get QUALCOMM Incorporated Report, meanwhile, slumped 8.25% after the smartphone chipmaker forecast weaker-than-expected near-term profits amid a downturn in broader consumer demand.
