Financial markets suffered an absolute bloodbath in the days leading up to the Federal Reserve’s decision on Wednesday, as shares fell and bond yields rose after surprisingly hot inflation data – a sign that investors fear a more Volker-like response from of Federal Reserve Chairman Jerome Powell and the rest of the Federal Open Market Committee.
But now that the dust has settled, it seems Powell couldn’t help but be himself – and stocks and bonds thanked him after the Fed provided a 75-point increase in federal interest rates, his biggest move since 1994.
After a muted initial reaction in which the bond yield curve briefly reversed, bond, stock and even cryptocurrency prices rose as Powell left enough room to move on about the size of the increase investors can expect. meeting in July, as Powell said he could go with 75 basis points or 50 basis points – and that the Fed, as always, will remain dependent on data.
“I think we came to this meeting, people were really afraid of the worst, that not only would we get 75 basis points, but that he would talk a lot of hawks,” said Kenneth G. Tropin, founder and chairman of Graham Capital Management. , a $ 18 billion macro hedge fund. “In the end, he didn’t do it, he wisely gave himself some option.”
Instead of shocking the markets with a more hawkish tone, Powell was “more diplomatic, more measured.” But that’s the way it is, “Tropin added.
After all, it looks like the market may have outpaced itself during the recent sell-off as investors prepared for a 75-point rise on Wednesday, expectations that seem to have been cemented by a report in The Wall Street Journal on Monday showing that the big move was under consideration.
Some market gurus, including Jeremy Siegel of the University of Pennsylvania, responded by urging the Fed to “take its medicine” and increase it by a full percentage point. In response to changing expectations, interest rate futures began pricing at 75 basis points not only in June but also in July, when the Fed’s policy committee will hold its next two-day meeting.
But when it came down to it, Powell chose to leave enough room to continue with a 50-point increase in July, and investors applauded, Tropin said.
However, there is always the possibility of more pain ahead. Regarding the Fed’s “point chart” and economic forecasts, Allianz’s Mohammad El-Erian said that the “pre-charge” of the Fed’s rise in interest rates and the slowdown in economic growth were a signal of a stagflationary baseline. “. MarketWatch previously wrote more about what this might mean for markets.
Shares ended the session higher on Monday, with the S&P 500 SPX up 1.46% up 1.5% at 3,789, the first daily gain after a historic five-day losing streak in which the high-capital benchmark fell more than 10%. to trade at its lowest since early 2021, as it confirmed its decline in the bear market. The Dow Jones Industrial Average DJIA, + 1.00%, rose just over 300 points, or 1%. Nasdaq Composite COMP, + 2.50% ended 2.5% higher at 11,099. Bitcoin BTCUSD, + 3.72% ended the day lower, but well from its low levels after the Fed.
The Cboe volatility index, often called the VIX, ended the day lower at 29.4, but outside its lowest levels of the session as stocks cut their gains towards closing. Still, the index peaked above 35 earlier this week.
It is worth noting that the yield on five-year TMUBMUSD05Y treasury bonds, 3.375%, remains higher than that of 30-year TMUBMUSD30Y treasury bonds, 3.333%. Although the FOMC forecasts do not portend a recession, and Powell denied that the central bank’s goal is to provoke one, the Fed chairman said higher unemployment would be a sign that Fed policy is working.
Overall, however, both bonds and stocks ended the day higher as the “easing rally” in stocks extended to bonds. Whatever happens next on the yield curve, long-term interest rates are likely to remain “anchored” as the economy begins to take on a staggering flavor, said Brian Price, head of investment management, Commonwealth, a network of independent brokers. dealers who manage $ 150 billion.
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Both stocks and bonds are likely to remain volatile as investors focus on economic data as well as corporate profits, which will be a factor when the second-quarter earnings season begins next month.
“I don’t think the market will find its basis until inflation falls,” Price said.
And unfortunately, the Fed can do so much about it.
“The Fed can make so much obvious that it can only control so much… there are other aspects of supply. “The Fed can’t really affect energy supplies, hopefully there will be some improvements,” he said.
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