Stocks indexes end lower after inflation data and Fed minutes and ahead of bank earnings
U.S. stock indexes finished lower in choppy trade on Wednesday after minutes from the Federal Reserve’s March policy meeting showed policymakers agreed that the stress in the banking sector would slow U.S. economic growth. Investors also assessed a March consumer price index report which shows inflation slowing, though still elevated.
How stock indexes traded
- The S&P 500 SPX, -0.41% shed 16.99 points, or 0.4%, to end at 4,091.95
- The Dow Jones Industrial Average DJIA, -0.11% was off 38.29 points, or 0.1%, to finish at 33,646.50
- The Nasdaq Composite COMP, -0.85% dropped 102.54 points, or 0.9%, ending at 11,929.34
On Tuesday, the Dow Jones Industrial Average rose 98 points, or 0.29%, to 33,685, the S&P 500 closed less than a point lower at 4,108.94, and the Nasdaq Composite dropped 52 points, or 0.43%, to 12,032.
What drove markets
U.S. stocks ended lower on Wednesday with the three major indexes flipping into losses in the afternoon trade in the wake of the minutes from the Federal Reserve’s March 21-22 meeting. Earlier stocks had seen initial gains following the release of inflation data.
“Many” Fed officials said that the likely effects of the banking stress had led them to lower their estimate of the peak interest rate that would be needed to bring inflation under control, according to minutes of the meeting released Wednesday.
Meanwhile, Fed staff projected that the economy may enter a “mild recession” later this year before recovering over the next two years, according to the minutes.
“Their [Fed staff] forecasts are different than the FOMC’s. However, the Summary of Economic Projections (SEP), submitted by Fed officials, does imply a recession is possible. The forecasted increase in the unemployment rate in the SEP between the end of last year and the end of 2023 has never occurred without the economy being in a recession,” wrote Ryan Sweet, chief US economist at Oxford Economics, in a Wednesday note.
“Fed officials are unlikely going to publicly say a recession is their baseline but reading the tea leaves, they recognize they’re facing Hobson’s Choice, a mild recession soon or stagflation down the road.”
The U.S. consumer-price index rose 0.1% in March, according to data released by the Bureau of Labor Statistics on Wednesday. Economists polled by the Wall Street Journal had forecast a 0.2% increase. The yearly rate of inflation slowed to 5% from 6% in the previous month.
The so-called core rate of inflation, which omits food and energy prices, rose a sharper 0.4%, as expected, but the pace of annual core CPI inflation went up to 5.6% from 5.5% in February.
“Despite the 0.4% gain in the core inflation figure, today’s data release will most likely be perceived as welcome news because headline was marginally light of expectations and core was in-line,” said Alexandra Wilson-Elizondo, co-head of portfolio management for multi asset solutions at Goldman Sachs Asset Management.
“The continued strength in the core figure is not consistent with the Federal Reserve’s 2% long-term target and will keep a 25-bps hike on the table for the May meeting.”
While the CPI data is “good news,” core CPI numbers show that inflation is still sticky, according to Giles Coghlan, chief market analyst at HYCM. “That’s why we’re not seeing an unmitigated relief rally off the initial print,” Coghlan said.
Fed funds futures traders are pricing in a 68.9% likelihood that the Fed will raise interest rates by another 25 basis points to between 5% and 5.25% next month, followed by a pause and one or two rate cuts by the end of 2023, according to the CME FedWatch Tool.
David Nicholas, chief executive officer of Nicholas Wealth Management, said markets have been “a little too opportunistic” as the Fed will not get anywhere close to pausing until they believe this fight against inflation is done.
“I don’t think anyone’s ready to make the case that inflation is gonna be at 2%-level overnight,” and the gap between the market and the Fed is “the timetable that inflation will really get closer to 2% number,” Nicholas told MarketWatch via phone.
Adding to investor caution is the looming first-quarter U.S. corporate earnings season, which gets into gear on Friday when the likes of JPMorgan Chase JPM, -0.02%, Wells Fargo WFC, -0.46% and Citigroup C, -0.59% will present their numbers.
“If financials come out later this week and are reasonably at or even above expectations, you’re probably gonna see this market heading higher,” said Nicholas.
Wilson-Elizondo of Goldman Sachs Asset Management, also thinks bank earnings, most critically management teams’ commentary and forecasts, will be most telling about the direction of the economy and markets, she told MarketWatch in emailed comments.
Companies in focus
- Shares of Tessco Technologies Inc. TESS, +87.02% ended up 87% on Wednesday toward a two-year high after the wireless-infrastructure company announced an agreement to be acquired by Alliance Corp. and GetWireless LLC in a deal reflecting a 91.5% premium.
- Shares of American Airlines Group Inc. AAL, -9.22% declined 9.2% Wednesday after the air carrier provided a somewhat downbeat first-quarter profit outlook.
- ShotSpotter Inc., whose technology is used by law enforcement to detect gunshots, has rebranded under a new name, SoundThinking Inc. SSTI, +1.04%, after its stock tumbled following last week’s Chicago mayoral election. Its shares finished 1% higher.