Stocks wobble ahead of Fed with Powell as 'wild card': Markets Wrap

(Bloomberg) — Wall Street traders refrained from making big bets ahead of the Federal Reserve's decision as they prepared to see whether Jerome Powell will throw cold water on interest rate cut hopes.

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After the S&P 500 hit another all-time high, stock prices fluctuated. Bonds were little changed on Wednesday after handing investors losses this year as expectations faded that the Fed would ease monetary policy significantly.

Investors will focus on Fed officials' forecasts for interest rates – the “dot plot” – which will show how much easing the committee expects in 2024 and 2025. The central bank will also hold a discussion about its $7.5 trillion balance sheet, which it shrank by letting some securities expire without replacing them – a process known as quantitative tightening.

The S&P 500 hovered near 5,180. Intel Corp. rose after it received $20 billion in U.S. funding to expand its chip factories. Boeing Co., which had predicted a massive cash outflow in the first quarter, slipped. Short seller Hindenburg Research took aim at Equinix Inc., causing shares to plunge. The yield on 10-year government bonds remained little changed at 4.29%. The dollar rose slightly.

What will Powell say?

Will he repeat the aggressive tone of his January press conference? Or will he repeat his more dovish testimony to Congress earlier this month? We assume the former, but the latter entails significant risks.

Growth and inflation forecasts are likely to be raised. However, it is the “dot plot” that will attract the most attention – and we see the danger of a restrictive turn.

The story goes on

We expect the Fed will likely slightly revise its growth, inflation and employment forecasts for 2024 at this week's meeting – and it's a “close call” whether officials' median forecast for the key interest rate will also shift higher .

Investors will be particularly keen to see anything Powell says that suggests he has changed his view of inflation trends since his “not far off” testimony to Congress.

Possible balance sheet discussions or information about the QT also contribute to the wildcard character of this afternoon.

50 basis points versus 75 basis points of cuts remains the big debate – but keep in mind that 2025 and 2026 will be minimally affected by any changes made through 2024.

An increase in the long-term point would have a curve-wide bearish effect on the Treasury market.

If the committee decides to “roll back” a rate cut, markets may have difficulty absorbing it. This decision would mean that the Fed sees inflation as more stubborn than it thought three months ago. Investors would reasonably ask themselves, “What do they know that they don’t share?”

If the Fed takes a hawkish stance and signals a longer-term higher monetary policy stance (stronger than already priced in), some volatility can be expected. A dovish decision that suggests confidence in a soft landing could see the rally reach new highs in 2024.

Company highlights:

• JPMorgan Chase & Co. unexpectedly raised its dividend by 9.5% after the company posted a record annual profit and regulators signaled they may reconsider proposals to tighten capital rules.

• Apple Inc. Chief Executive Tim Cook arrived in China on Wednesday to highlight the country's importance as a market and manufacturing base and to reach out to Chinese consumers who may be wary of the iPhone maker.

• Chipotle Mexican Grill Inc. said its board has approved a 50-to-1 split of its shares and will present the change to shareholders on June 6.

• Kering SA warned that sales of Gucci, its biggest brand, fell about 20% in the first quarter.

• Tencent Holdings Ltd. plans to more than double its share buyback program to at least $12.8 billion by 2024, easing investor concerns about a gradual slowdown in growth during an economic downturn in China.

• Samsung Electronics Co. posted its highest gain in more than six months after Nikkei Asia reported that Nvidia Corp. to buy its high-bandwidth memory chips, marking a milestone for Korea's largest company.

• The Biden administration is considering blacklisting a number of Chinese semiconductor firms with ties to Huawei Technologies Co. after the telecommunications giant made a major technological breakthrough last year, people familiar with the matter said.

Important events this week:

• Eurozone S&P Global Services PMI, S&P Global Manufacturing PMI, Thursday

• Bank of England interest rate decision, Thursday

• US Conference Board leading index, existing home sales, initial jobless claims, Thursday

• Nike, FedEx earnings, Thursday

• Japan CPI, Friday

• Germany IFO business climate, Friday

• Atlanta Fed President Raphael Bostic speaks Friday

• Robert Holzmann and Philip Lane from the ECB will speak on Friday

Some of the key moves in the markets:

Shares

• The S&P 500 was little changed at 9:30 a.m. New York time

• The Nasdaq 100 rose 0.2%

• The Dow Jones Industrial Average fell 0.2%

• The Stoxx Europe 600 has hardly been changed

• The MSCI World Index has hardly changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.2% to $1.0841

• The British pound fell 0.2% to $1.2692

• The Japanese yen fell 0.6% to 151.76 per dollar

Cryptocurrencies

• Bitcoin fell 0.6% to $63,394.04

• Ether rose 2% to $3,345.06

Tie up

• The yield on 10-year government bonds remained little changed at 4.29%

• The 10-year German government bond yield fell two basis points to 2.43%

• The 10-year UK government bond yield fell three basis points to 4.03%

raw materials

• West Texas Intermediate crude fell 1.8% to $82 a barrel

• Spot gold fell 0.3% to $2,151.46 an ounce

This story was produced with support from Bloomberg Automation.

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