Why the Fed’s latest rate hike sent stocks soaring: Morning Brief

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Thursday, July 28, 2022

Today’s newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.

Stocks moved in one direction on Wednesday — higher.

When the closing bell rang, the Nasdaq was up over 4%, the S&P 500 had risen 2.6%, and the Dow was up 1.4%. This marked the Nasdaq’s biggest rally since November 2020.

Including Wednesday’s surge, the S&P 500 has gained more than 1% after each of the Fed’s last four meetings, all of which have included interest rate hikes from the central bank.

And since hitting its most recent low on June 16, the S&P 500 is now up 10%.

What ultimately moved markets on Wednesday was, as always, expectations. Specifically: expectations that the most aggressive of the Fed’s actions to raise interest rates may now be behind us.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., July 27, 2022. REUTERS/Elizabeth Frantz

“Chair Powell bolstered expectations of a policy pivot at his July FOMC press conference,” said Neil Dutta, head of economics at Renaissance Macro. “He noted that it is ‘likely appropriate to slow [rate] increases at some point.’ Importantly, the rising uncertainty in the economic outlook has pushed the Fed away from explicit forward guidance to data dependence. Financial markets have responded in kind.”

On Wednesday, the Federal Reserve voted to raise its benchmark interest rate by 0.75%, the second-straight meeting the central bank made a move of this magnitude. In Powell’s outline, these aggressive moves are targeted solely at bringing down inflation.

“From the standpoint of our Congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labor market is extremely tight, and inflation is much too high,” Powell said.

The Fed hasn’t raised interest rates by this magnitude in consecutive meetings since the early ’80s. Inflation in June stood at 9.1%, the highest since 1981.

In both its policy statement and comments during Powell’s press conference on Wednesday, investors and economists saw the outline of a central bank set to ease off the gas pedal in the coming months.

This is a welcome development for investors.

“The Chairman’s press conference was very clear in recognizing an economy that shows some indications of slowing,” said Rick Rieder, BlackRock’s CIO of global fixed income. “We have often said that ‘high prices are the cure for high prices,’ and indeed we are watching that dynamic play out loud and clear across the country today.”

How much conviction the Fed will maintain in this view in the coming months, however, remains an open question as we head towards the fall and beyond.

And recent history suggests yet another change in the Fed’s attitude — and a resulting swing in financial markets — may not be far off.

“Powell is the same fellow that in 2018 went from saying rates were a ‘long way to neutral’ to cutting rates not long thereafter,” Dutta said. “He’s the same guy that pulled forward tapering after trying to push it out. The same guy that largely ruled out a 75bp hike in May before doing it in June. Markets have now sensed a pivot from a hawkish June stance, feeding into expectations for rate cuts.”

“I hold out on the idea that another 180 is plausible,” Dutta added. “Don’t rule it out.”

What to Watch Today

Economic calendar

8:30 a.m. ET: GDP Annualized, quarter-over-quarter, Q2 advance estimate (0.4% expected, -1.6% during prior quarter)
8:30 a.m. ET: Personal Consumption, quarter-over-quarter, Q2 advance estimate (1.2% expected, 1.8% during prior quarter)
8:30 a.m. ET: GDP Price Index, quarter-over-quarter, Q2 advance estimate (8.0% expected, -8.2% during prior quarter)
8:30 a.m. ET: Core PCE, quarter-over-quarter, Q2 advance estimate (4.4% expected, 5.2% during prior quarter)
8:30 a.m. ET: Initial Jobless Claims, week ended July 23 (250,000 expected, 251,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended July 16 (1.386 million expected, 1.384 million during prior week)
11:00 a.m. ET: Kansas City Manufacturing Index, July (4 expected, 12 during prior month)

Earnings

Apple (AAPL), Amazon (AMZN), Pfizer (PFE), Honeywell (HON), Mastercard (MA), Comcast (CMCSA), Intel (INTC), Roku (ROKU), Merck (MRK), Keurig Dr. Pepper (KDP), Hertz Global (HTZ), T.Rowe Price (TROW), Valero Energy (VLO), Northrop Grumman (NOC), V.F. Corporation (VFC), Frontier Group (ULCC), Southwest Air (LUV), Harley-Davidson (HOG), Shell (SHEL), Stanley Black and Decker (SWK), Carlyle Group (CG), Lazard (LAZ), International Paper (IP), Sirius XM (SIRI), Hershey (HSY), PG&E (PCG), Hartford Financial (HIG), Celanese (CE)