The S&P 500 rose 2.2% on Wednesday, as the market brushed off a hawkish-sounding FOMC decision once Fed Chair Powell started speaking. The Nasdaq Composite (+3.8%) and Russell 2000 (+3.1%) both gained more than 3.0% while the Dow Jones Industrial Average increased 1.6%.
Eight of the 11 S&P 500 sectors closed higher, with the consumer discretionary (+3.4%) and information technology (+3.3%) sectors also rising more than 3.0%. Conversely, the energy (-0.4%) and utilities (-0.2%) sectors closed lower.
Prior to the Fed, the session started with a risk-on mindset, bolstered by huge gains in Chinese markets after Beijing vowed support for the economy and financial markets and reports indicated that Russia and Ukraine continued to make progress in peace talks. The market continued to relish the idea of a ceasefire, even as Ukraine rejected a neutrality plan proposed by Russia.
Regarding the Fed, the central bank raised the target range for the fed funds rate by 25 basis points to 0.25-0.50%, as expected, and signaled six more rate hikes this year with four additional hikes next year. The statement noted that the Fed would begin reducing its balance sheet at an upcoming meeting (possibly in May, according to Fed Chair Powell).
The projections for interest rates were a bit more hawkish than anticipated, stoking concerns about a policy mistake that could hinder economic growth. That view was telegraphed in the Treasury market, as the yield curve flattened via a sharper rise in shorter-dated rates.
The Fed, per usual, produced some volatility in the market. The S&P 500 was up 1.3% prior to the decision (paring early gains), then fell 0.3% into negative territory following the statement. Stocks, however, swiftly recovered during Fed Chair Powell’s press conference to close at session highs.
Fed Chair Powell soothed the market with one of his first statements being that he thinks the probability of a recession within the next year is low. He added that the reduced 2022 GDP growth forecast of 2.8% was tied to Russia’s invasion of Ukraine instead of the expected impact of the Fed’s tightening actions. Mr. Powell acknowledged that monetary policy could weigh on inflation and growth rates in 2023 and 2024.
Treasury yields backtracked from highs, but they still settled on a curve-flattening note. The 2-yr yield increased 13 basis points to 1.97% (hit 1.92% post-settlement), and the 10-yr yield increased two basis points to 1.18%. The U.S. Dollar Index fell 0.8% to 98.34. Crude futures fell 0.8%, or $0.74, to $95.42/bbl.
Reviewing Wednesday’s economic data:
- The Retail Sales report was not as disappointing as the headlines might suggest. Total retail sales increased 0.3% month-over-month in February (Briefing.com consensus +0.4%), yet they were actually stronger than expected after accounting for the large upward revision to January to +4.9% from +3.8%. The same goes for retail sales, excluding autos. They were up 0.2% month-over-month (Briefing.com consensus +0.8%), yet that followed an upward revision for January to +4.4% from +3.3%.
- The key takeaway from the report is that there was a natural slowdown after a huge month of sales in January; however, gasoline station sales (+5.3%) were the difference maker in February. Excluding gasoline stations, retail sales declined 0.2% month-over-month, providing a sign of things to come perhaps as gas prices have moved higher in March.
- Import prices rose 1.4% in February after increasing 1.9% in January. Excluding oil, import prices rose 0.8% after increasing 1.3% in January. Export prices rose 3.0% after increasing 2.8% in January. Excluding agriculture, export prices also rose 3.0% after increasing 2.8% in January.
- The NAHB Housing Market Index for March decreased to 79 (Briefing.com consensus 81) from a revised reading of 81 (from 82) in February.
- Business inventories increased 1.1% m/m in January following a revised 2.4% increase (from 2.1%) in December.
- The weekly MBA Mortgage Applications Index declined 1.2% following an 8.5% increase in the prior week.
Looking ahead, investors will receive Housing Starts and Building Permits for February, weekly Initial and Continuing Claims, Industrial Production and Capacity Utilization for February, and the Philadelphia Fed Index for March on Thursday.
- Dow Jones Industrial Average -6.3% YTD
- S&P 500 -8.6% YTD
- Russell 2000 -9.6% YTD
- Nasdaq Composite -14.1% YTD
Overseas:
- Europe: DAX +3.8%, FTSE +1.6%, CAC +3.7%
- Asia: Nikkei +1.6%, Hang Seng +9.1%, Shanghai +3.5%
Commodities:
- Crude Oil -0.74 @ 95.42
- Nat Gas +0.19 @ 4.80
- Gold -17.20 @ 1909.40
- Silver -0.47 @ 24.68
- Copper +0.10 @ 4.60