Market Snapshot: Dow trims losses as Fed’s Powell cheers economic recovery, after slightly ‘hawkish’ update on monetary policy

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U.S. stock indexes pared losses Wednesday afternoon, as Wall Street reacted to Federal Reserve Chair Powell’s optimistic tone on the U.S. economic recovery after a slightly “hawkish” policy update that raised inflation forecasts and brought forward the timing of an interest rate rise.

How are stock benchmarks trading?
  • The Dow Jones Industrial Average

    traded 186 points lower around 34,111 off by about 0.6%.
  • The S&P 500 index

    traded about 13 points lower, or 0.3%, at 4,233.
  • The Nasdaq Composite Index

    slipped 5 points to 14,068, after flipping between positive and negative territory.

On Tuesday, the Dow fell 94.42 points, or 0.3%, to 34,299.33; the S&P 500 finished off 8.56 points, or 0.2%, at 4,246.59; the Nasdaq Composite declined 101.29 points, or 0.7%, to 14,072.86.

What’s driving the market?

Stocks were lower, but were off the session’s worst levels, after the Fed left its easy monetary policy stance unchanged, but signaled the central bank expects to hike rates twice in 2023, and raised its inflation forecast, as part of its April policy statement update.

The Fed said it would keep its bond purchases unchanged at $80 billion of Treasurys and $40 billion of mortgage-backed securities each month.

Live blog: Fed decision day and Powell presser

See also: Fed now sees two interest rate hikes in 2023

“At first glance, it is a little bit hawkish,” Zhiwei Ren, portfolio manager of Penn Mutual Asset Management, told MarketWatch, following the central bank’s statement and update.

The Fed also said it would slightly raise the overnight borrowing rate it pay banks and others to park cash temporarily with the central bank, and bumped up the rate it pays on overnight reverse repurchase agreements, which have seen a surge in demand in recent weeks.

In its statement, the Fed stuck to its guns and said the recent burst of inflation would be transitory. At the same time, it acknowledged that inflation would be much higher this year, raising its forecast for headline PCE inflation to 3%.

Powell, in an afternoon press conference, stressed the need for patience, as the U.S. labor market recovery has gotten a bit sluggish, but he also said improvements in employment should speed ahead into the summer and fall, as the vaccination effort continues and schools and childcare centers reopen.

“It is not a time to reach hard conclusions” Powell said, stressing the unusual nature of the pandemic-induced economic crisis, while also reiterating that any tapering of its asset purchases was “still a ways off” and will remain data dependent.

Last Thursday’s consumer-price index report from the U.S. Labor Department showed that the cost of living surged in May and drove the pace of inflation to a 13-year high of 5%, reflecting a broad increase in prices confronting Americans.

In the face of rising inflation, the timing of any tapering of asset purchases looks tricky for the U.S. central bank, since the recovery in the labor market still looks shaky and is reflected in the weaker-than-expected May nonfarm payrolls report and the job openings data, which hit a record 9.3 million.

“Quite honestly, the pace of the labor market recovery and trends on wage growth may even change the way the Fed sees things,” including around future potential rate hikes and tapering of its asset purchases,” said Omar Aguilar, chief investment officer of passive equity and multi-asset strategy at Charles Schwab Investment Management, in an interview with MarketWatch, during Powell’s press conference.

“We kind of expected him to hint at a less clear rate hike path,” Aguilar said, adding that the Fed penciling in two possible rate increases in 2023 was “the biggest surprise” of the policy update.

Some prominent investors and economists have voiced the opinion that the Fed may be too complacent about rising prices and that they that could turn out to be more lasting that the central bank forecasts.

Read: An inflation storm is coming for the U.S. housing market

In other economic news, U.S. housing permits dropped 3% in May to 1.68 million yearly pace, while starts climbed 3.6% to 1.57 million annual rate. April U.S. housing starts fell to 1.52 million from 1.76 million. U.S. import prices rose 1.1% in May—and were up 0.9% minus fuel—contributing to an 11.3% in the past 12 months.

Internationally, China said it plans to release national reserves of major industrial metals as to rein in a soaring commodities prices during a resumption of global economic activity. That news comes as data out of China showed that factory output slowed for a third straight month in May. Chinese industrial production rose 8.8% in May from a year ago, slower than the 9.8% uptick in April.

Which companies are in focus?
  • Oracle stock

    was in focus after Q4 results late Tuesday. The tech company reported fourth-quarter earnings of $4.03 billion, or $1.37 a share, on sales of $11.23 billion, up from $10.44 billion a year ago. Shares were down almost 6%.
  • Shares of meal-kit provider Blue Apron IncAPRN were in focus after the company priced a dilutive stock offering of 4.7 million shares at a discount of $4.25 per share. Its stock was down 22%.
  • ARK Invest disclosed that it purchased DraftKings DKNG shares worth $42 million on Tuesday, the same day the short selling research firm Hindenburg alleged the company’s gambling-technology unit operates in countries where gambling is banned. DraftKings says the subsidiary, SBTech, doesn’t operate in any illegal market. The DraftKings purchases by Ark — in the Ark Innovation ETF ARKW and the Ark Next Generation Internet ETF ARKK—were the largest single stock purchase by the Cathie Wood-run fund manager on Tuesday. Shares of DraftKings were up 0.7%.
  • Confluent IncCFLT, has set terms of its initial public offering, which could value the California-based data infrastructure software company at up to $8.33 billion.
  • Elanco Animal Health IncELAN said Wednesday it has entered an agreement to acquire Kindred Biosciences IncKIN for about $440 million, adding three potential dermatology blockbusters to its pipeline. Shares of Elanco were up 3.4%, while those for Kindred surged 45%.
  • WalkMe LtdWKME, an Israeli customer engagement platform, said Wednesday its initial public offering priced at $31 a share, compared with its proposed price range of $29 to $32.
  • IncAMZN said Wednesday it has committed $300 million to help accelerate the creation of up to 3,000 new affordable housing units across the Puget Sound area in Washington, in Washington, D.C. and Nashville. Its stock was up almost 1%.
How are other assets faring?
  • The yield on the 10-year Treasury note TMUBMUSD10Y rose 5 basis points to 1.55%, following the Fed statement.
  • The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, shot up 0.8%.
  • Oil futures CL00 settled at a slight gain, with West Texas Intermediate crude for July delivery up 0.04% at $72.15 a barrel. Gold futures GC00 settled higher at $1,861.40 an ounce.
  • European equities rose, with the pan-Continental Stoxx Europe 600 SXXP up 0.2%, booking a record-extending 9th straight all-time closing high. London’s FTSE 100 UKX  rose 0.2% to its highest level in a year.
  • In Asia, the Shanghai Composite SHCOMP closed down 1%, Hong Kong’s Hang Seng Index HSI ended 0.7% lower and Japan’s Nikkei 225 NIK shed 0.5%.

Bond Report: 2-year Treasury yields jump to highest in a year as Fed seen delivering ‘hawkish surprise,’ with 2 forecast interest rate hikes in 2023

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