Fed hikes key rate by 75 basis points
U.S. stocks rallied Wednesday, with the tech-heavy Nasdaq Composite posting its biggest daily percentage gain since April 2020, after the Federal Reserve raised its benchmark interest rate by another 0.75 percentage point to combat hotter-than-expected inflation.
Other indexes added to gains after Fed chair Powell noted in his press conference that another unusually large interest rate rise might be needed in September but would depend on upcoming economic data, while he added that it will also likely be appropriate to slow increases at some point.
What’s happening
- The Dow Jones Industrial Average DJIA jumped 436.05 points, or 1.4% to close at 32,197.59.
- The S&P 500 SPX gained 102.56 points, or 2.6%, to end at 4,023.61.
- The Nasdaq Composite COMP finished with a gain of 469.85 points, or 4.1%, at 12,032.42.
What’s driving markets
U.S. stocks rallied on Wednesday afternoon as Fed Chairman Jerome Powell said the central bank left the door open for an “unusually large increase” at its next meeting in September, but it would likely need to slow the pace of rate increases at some point.
Fed officials on Wednesday raised the target range for the federal funds rate to 2.25% – 2.5%. It was the second 75 basis point rate hike in a row and the fourth interest rate increase this year.
“There was no surprise that the Fed raised rates by 0.75% today — this was widely telegraphed, and if anything, for a brief time after the previous sky-high inflation numbers were released there were some who had expected an even bigger rate hike — but Chairman Powell gave even more details today describing what the Fed believes is needed in order to bring inflation back down,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, in an email comment.
“He pointed out that demand is too high and that they need to slow the economy down enough, in order to bring demand back in balance with supply,” said Zaccarelli. “Of course, the Fed is never going to explicitly say that they are trying to cause a recession, but they are saying very plainly that they are willing to slow down the economy — and if necessary, risk causing a recession — in order to bring demand back down.”
Many Wall Street economists expected the 75 basis points hike after the June inflation data came in hotter-than-expected. Markets also hoped Powell could address recession concerns and explain how economic data shaped the Fed’s decision.
“I don’t think the economy is in recession right now,” Powell said in a news conference after the Federal Open Market Committee issued a policy statement. “We are not trying to have a recession and we don’t have to.”
Treasury yields turned lower on Wednesday, while the spread between the 2- and 10-year yields remained deeply negative. The 2-year Treasury yield BX:TMUBMUSD02Y declined 7.3 basis points to 2.968%, while the yield on the 10-year Treasury BX:TMUBMUSD10Y fell 5.5 basis points to 2.731%.
“Are we going to have a period of an extended yield curve inversion? I believe that’s really hard to get away from,” said David Petrosinelli, senior trader at InspereX in a phone interview on Wednesday. “That seems to be a very likely path that’s substantiated with the data.”
In U.S. economic data Wednesday, durable-goods orders jumped 1.9% in June. That was largely due to more bookings for new cars and trucks, but there were hints of weakness among other manufacturers. Economists polled by the Wall Street Journal had forecast a 0.4% decline in new orders for products meant to last at least three years.
Meanwhile investors are digesting second quarter earnings reports. More than 150 S&P 500 companies have reported calendar second-quarter earnings thus far. Of those names, roughly 70% have beaten analyst expectations, FactSet data shows.
The rally Wednesday was led by tech stocks with the Nasdaq 100 outperforming after reassuring results from Alphabet, Microsoft and Texas Instruments TXN.
Alphabet GOOGL and Microsoft MSFT each missed earnings expectations in their reports Tuesday night, though shares of both were up as they both posted quarterly revenue growth. Among the wave of companies reporting results on Wednesday are plane maker Boeing BA and, after the market close, Facebook parent company Meta Platforms META META.
“There’s just a little bit more positive spin on what you’re seeing,” Edward Moya, senior analyst at OANDA said in a phone interview.
“Over the last 24 hours, we’ve had strong results from Microsoft, Alphabet. This morning alone, Boeing wasn’t that bad. We also saw some positive comments about the economy from Hilton and Visa as far as summer travel spending. Chipotle is doing pretty well. You had very strong durable goods numbers. So all of a sudden now we’re getting a rosier picture of the economy,” Moya said.
Companies in focus
- Boeing Co. BA stock gained 0.1% Wednesday, after the aerospace and defense company reported a wider-than-expected second-quarter loss and missed on revenue, but beat free cash flow (FCF) forecasts by a wide margin.
- Visa Inc V’s shares lost 1.0% Wednesday, after the company topped expectations with its latest results Tuesday and gave an upbeat signal to investors about the resilience of spending volumes in the current macroeconomic climate.
- Kraft Heinz Co. KHC shares declined 6.0% Wednesday, after the company reported second-quarter net income of $265 million, or 21 cents per share, after a loss of $27 million, or 2 cents per share, last year.
- Shares of Chipotle Mexican Grill Inc. CMG rallied 14.7% Wednesday after the fast-casual restaurant chain beat Wall Street’s quarterly expectations as menu price increases took out some of the sting from rising costs it faced.
- Hilton Worldwide Holdings Inc. shares HLT jumped 7.5% Wednesday, after the hotel chain blew past estimates for the second quarter. The company posted net income of $368 million, or $1.32 a share, for the period, up from $130 million, or 46 cents a share, in the year-earlier period.
- Texas Instruments Inc. TXN shares rose 6.7% Wednesday after the chip maker reported a big earnings beat for the quarter and an outlook that was mostly above Wall Street estimates.
Other assets
- The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 5.5 basis points to 2.731%.
- The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was up 0.1%.
- West Texas Intermediate crude for September delivery CL CL00 $2.28, or 2.4%, to settle at $97.26 a barrel on the New York Mercantile Exchange, the highest front-month finish since July 20, while September Brent crude BRNU22, the global benchmark, rose $2.22, or 2.1%, to $106.62 a barrel on ICE Futures Europe.
- Gold futures GC00 rose $1.40, or nearly 0.1%, to settle at $1,719.10 an ounce.
- The Stoxx Europe 600 XX:SXXP gained 0.5% and London’s FTSE 100 UKX, 0.61% rose 0.7%.
- The Shanghai Composite CN:SHCOMP ended 0.1% lower, while the Hang Seng Index HK:HSI lost 1.1% in Hong Kong and Japan’s Nikkei 225 NIK, +0.22% gained 0.2%.