Stocks fall, dollar gains after Fed hike cues

Several officials said an “insufficiently restrictive” policy stance could stall recent progress on reducing inflation pressures, according to the minutes of their latest policy meeting, suggesting they may miss their December target of 5.1%. are set to push rates higher than forecast. The statement also said that “almost all” officials at the meeting agreed that raising interest rates by 25 basis points was appropriate, while “some” were in favor or could support a 50 basis-point increase.

Ben Jeffery at BMO Capital Markets:

“There wasn’t a great deal of new information. The most notable finding was that few participants saw a case for a 50 bp increase in February, although support for a 25 bp move was ultimately unanimous.

Matthew Weller on Forex.com and CityIndex:

“Going forward, there is nothing in these FOMC minutes that should prevent the central bank from keeping interest rates ‘high for a long time’ if US economic data continues to be stronger than expected.”

Quincy Crosby at LPL Financial:

“Overall, the minutes suggest a ‘wait and see’ approach as they remain data dependent. Should inflation continue to climb, based on the minutes, there could be enough voting members for a 50 basis-point move.” Are.”

Mike Lowengart in the Morgan Stanley Global Investment Office:

“The bottom line is that many of the market headwinds are not going away and investors should expect volatility to persist as they analyze impact rates going higher over longer periods of time.”

Chris Zaccarelli at the Independent Consultants Alliance:

“The Fed minutes have something for everyone, with bulls mostly able to point to soft language and concerns about financial stability and the upcoming debt limit fight (e.g. arguing for easier policy), while bears focus on inflation.” And there’s no mention of the word “disinflation” (i.e. inflation coming down), so clearly the Fed believes the risk to the upside is on inflation and they’re ready to cut rates. Can’t be in a hurry.

David Russell on TradeStation:

“No news from the Fed is good news. Hearing that almost all policymakers favor 25 basis points confirms that the Fed has shifted into a slower gear in its rate hike. Staying open and assessing data Their willingness to do so reflects little of a firm commitment to extreme dovishness. These minutes from the Fed keep investors in wait-and-see mode.”

In the run-up to the Fed’s minutes, a Bloomberg survey of economists showed inflation that is proving increasingly stubborn may give the central bank more room to raise rates to even higher peak levels and keep them through the year. Will inspire. Forecasters raised their projections for the Fed’s preferred inflation gauge for each quarter through the first half of next year.

Apart from the Fed, traders kept an eye on a few corporate highlights.

Apple Inc. The U.S. has a moonshot-style project underway that dates back to the Steve Jobs era: non-invasive and continuous blood sugar monitoring, according to people familiar with the effort. Intel Corp slashed its dividend payout to its lowest level in 16 years. Investors will also be interested in hearing from one of this year’s top performers in the S&P 500: Nvidia Corp., which is due to report results after the close.

Traders pinned hopes on earnings season to push the S&P 500 somewhere out of a trading range it has been stuck in for months. Between results from JPMorgan Chase & Co, which kicked off announcement season, and a report from Walmart Inc on Tuesday, the S&P 500 added 0.4%. That ties for the smallest earnings-season response in either direction since 2018, data compiled by Bloomberg show.

skepticism

“After a strong start to the year driven by absolute and relative short-covering by institutional investors, doubts remain over the sustainability of the rally, and bears are starting to wrestle with bulls,” said Mark Hackett, head of investment research. nationwide. “While institutional investors have been net buyers this year, they are conservatively positioned and quick to sell, while retail investors continue to buy equities aggressively.”

“It is a similar trend to what we saw in the second half of 2022,” he said.

Another thing that traders are taking note of is the recent spike in equity volatility. And that’s because after a long bearish period, it could test the S&P 500’s rally. The so-called VIX is near its highest level since mid-December.

“There was some huge upside call buying activity on the VIX in February as traders turned bearish on equity market resilience,” said Gurmeet Kapoor of Aurel.

This is in stark contrast to data at the end of last month, which showed very few were betting against a rally. Shares on debt, an indication of short-selling interest, were below 1% of the S&P 500’s average free float as of January 31, according to data compiled by S&P Global Market Intelligence.

As the Fed’s most ambitious policy tightening in decades tests investors’ resolve toward equities, US companies are increasingly relying on buybacks to boost their market valuations.

Companies in the S&P 500 will buy back at least $936 billion in shares in 2022, compared to the $565 billion they paid out in dividends, according to estimates by Howard Silverblatt at S&P Dow Jones Indices. This is the highest amount of buyback since the turn of the millennium.

Geopolitical tensions also emerged in the background.

US President Joe Biden said Russian President Vladimir Putin made a “big mistake” by suspending participation in the New START nuclear treaty, his first direct response to the announcement. Biden made brief remarks on Wednesday ahead of a meeting with a group in Warsaw. The eastern-flank NATO allies are known as the Bucharest Nine.

Meanwhile, Putin said he was looking forward to his Chinese counterpart Xi Jinping’s visit to Russia as he hailed deepening ties with Beijing in talks with China’s top diplomat.

Elsewhere, US natural gas futures are trading at levels not seen since pandemic-era lockdowns more than two years ago that stifled economic activity, slashing energy demand.