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Wall Street Is Bracing for Fed’s ‘Hawkish Hold’: Markets Wrap

Wall Street Is Bracing for Fed’s ‘Hawkish Hold’: Markets Wrap
Pedestrians in front of an electronic stock board outside a securities firm in Tokyo, Japan, on Friday, March 17, 2023. Japanese stocks rose on Friday as sentiment improved after Wall Street banks stepped in to rescue First Republic Bank. Photographer: Kiyoshi Ota/Bloomberg

Stocks, bonds and the dollar saw small moves, with traders betting the Federal Reserve will keep interest rates steady on Wednesday while hinting at the possibility of hiking again, if warranted.

The S&P 500 edged higher. FedEx Corp., a global economic bellwether, is due to report earnings after the close. Two-year US yields halted a four-day advance. The dollar fell against all of its developed-market peers. Oil rose, with Brent once again approaching $95 a barrel. The pound underperformed as the market pared bets on further Bank of England tightening after an inflation slowdown.

Read: JPMorgan Sees Fed in ‘Uncomfortable’ Jam Into 2024: Surveillance

The Federal Open Market Committee is expected to keep rates in a range of 5.25% to 5.5% — a 22-year high. The rate decision and committee forecasts will be released at 2 p.m. in Washington. Chair Jerome Powell will hold a press conference 30 minutes later. Wall Street will be focused on whether Fed officials’ forecasts for interest rates, the so-called dot plot, show the committee seems determined to hike again.

Bank of America Corp.’s Chief Financial Officer Alastair Borthwick said prospects for a US economic downturn are getting dimmer amid robust consumer spending. Meantime, Pacific Investment Management Co.’s money manager Geraldine Sundstrom noted that markets may be underestimating the risks of both a recession and one more interest-rate hike from the Fed, making haven assets a preferred play.

Countdown to Fed:

  • Richard Flynn, managing director at Charles Schwab UK:

“While rates should remain steady, a question mark remains over the longer-term outlook. Now that inflation has peaked, we are likely to see the Fed shift to a more surgical approach. There continues to be a possibility of a hike later this year as central bankers target remaining sticky areas, but one more boost is unlikely to trouble the market.”

  • Gabriele Foà, portfolio manager at Algebris Investments:

“We expect the Fed to hold rates steady today, but to maintain a tightening bias. Their updated projections are likely to show one more hike in 2023, higher growth in 2023/2024 but with the aim to stabilize inflation.”

“Economic weakness will take a more central role in the market narrative. As a result, we are adding back in some risk, but remain cautious. Yield levels at the long end of the curve do not reflect economic deterioration. We thus see a good opportunity for duration extension, and we are gradually increasing exposure to rates across our global credit strategy.”

  • George Ball, chairman of Sanders Morris Harris:

“The Fed is unlikely to raise interest rates on Wednesday, but a November rate hike is on the table, especially if inflation heats up, even marginally. The Fed probably doesn’t need to raise rates again. The markets are flailing, looking for a directional signal other than rate hikes or cuts. That signal is apt to be earnings, which are going to surprise with their strength.”

  • Will Compernolle, macro strategist at FHN Financial:

“We believe the most likely scenario is a ‘hawkish pause,’ where the Fed leaves rates unchanged at this meeting, but firmly communicates the possibility for additional hikes this cycle.”

“Treasury yields may not entirely find their new footing until tomorrow’s session, or Friday when Fed officials are allowed to speak publicly again. Market reactions will be bigger if the prevailing read is that of a ‘dovish pause,’ whereas a continuation of the Fed’s slightly hawkish tone will be met with an unconvinced, more modest market response.”

  • Judith Raneri, vice president at Gabelli Funds:

“The markets will focus on hints about further hikes this year — how many dots point to one more and how many point to more than one — and given recent inflation readings it might lead the Fed to forecast two additional hikes this year. All the talk of ‘higher for longer,’ suggests the Fed may not want to start cutting as soon as the market currently expects.”

“Even if inclined to hike in November, participants will not show their cards this week. Yes, the dot plot will show how many expect another increase, but Powell will not commit to it, sticking to the data-dependent rhetoric that all future Fed decisions are data dependent.”

  • Peter Boockvar, author of the Boock Report:

“I’m of the belief that today could be one of the most uneventful Fed meetings we’ve had in a while. The same can be said potentially about the press conference in that no one expects any change today, the ‘dot plot’ which should be renamed the ‘dart board’ will leave open the possibility of another hike in November as we already expect and we’ll see just a few calls for rate cuts in 2024 as higher for longer will remain a theme for now.”

“I also want to emphasize here the ‘dart board’ theme because what we’ll see today on that board reflects only how people feel today and we will see a ton of data just by year-end 2023 that will again influence those forecasts for next year.”

  • Dennis DeBusschere, founder of 22V Research:

“The watch point for investors is on what the FOMC assumes for cuts in 2024. They are highly likely to keep to the November rate hike in 2023 in the forecast and reduce the amount of rate cuts in 2024 from -100bp to -75bp.”

“How forcefully Powell pushes back, or not, against the forecast for fed funds in 2024 will be important. Especially if the DOTS come in on the hawkish side. Remember, in June the DOTS came in slightly hawkish and the market didn’t care after Powell went to great lengths to dismiss them.”

  • Andrew Brenner, head of international fixed income at NatAlliance Securities:

“Hawk watchers will be disappointed today. We think the Fed will be more neutral to dovish that the expectation.”

  • Win Thin, global head of currency strategy at Brown Brothers Harriman:

“We expect a hawkish hold. Recent data have been mixed enough for the Fed to feel comfortable with another skip. We believe the Fed will be sufficiently hawkish so that markets don’t think it is done hiking. The economy is still growing above trend and the labor market remains extremely tight. Financial conditions are the loosest since early March 2022, before the Fed started hiking.  Simply put, current conditions warrant further tightening.”

Corporate Highlights

  • Pinterest Inc. climbed, with analysts positive on the social-networking company in the wake of its investor day event.
  • International Business Machines Corp. advanced after being rated outperform at RBC Capital Markets.
  • Coty Inc. rose after raising its sales outlook for the current fiscal year, citing continued robust demand for higher-end fragrances.
  • Instacart’s debut rally is fizzling out, just a day after it went public in one of this year’s biggest US listings.
  • Chewy Inc. fell after the pet-supplies retailer was downgraded to market perform from outperform at Oppenheimer & Co.

Key events this week:

  • Eurozone consumer confidence, Thursday
  • Bank of England policy meeting, Thursday
  • US leading index, initial jobless claims, existing home sales, Thursday
  • China’s Bund Summit, Friday
  • Japan CPI, PMIs, Friday
  • Bank of Japan rate decision, Friday
  • Eurozone S&P Global Eurozone PMIs, Friday
  • US S&P Global Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 0.2% as of 11:36 a.m. New York time
  • The Nasdaq 100 fell 0.2%
  • The Dow Jones Industrial Average rose 0.5%
  • The Stoxx Europe 600 rose 0.9%
  • The MSCI World index rose 0.2%

Currencies

  • The Bloomberg Dollar Spot Index fell 0.2%
  • The euro rose 0.4% to $1.0719
  • The British pound was little changed at $1.2394
  • The Japanese yen rose 0.1% to 147.66 per dollar

Cryptocurrencies

  • Bitcoin fell 0.2% to $27,125.39
  • Ether fell 0.9% to $1,627.56

Bonds

  • The yield on 10-year Treasuries declined four basis points to 4.32%
  • Germany’s 10-year yield declined three basis points to 2.70%
  • Britain’s 10-year yield declined 12 basis points to 4.22%

Commodities

  • West Texas Intermediate crude rose 0.3% to $91.43 a barrel
  • Gold futures rose 0.6% to $1,964.80 an ounce
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