U.S. stock benchmarks flipped between small gains and losses early Thursday, a day after the Federal Reserve rattled the market by raising its forecast for inflation and signaling that it could lift benchmark interest rates sooner than had been expected
The central bank also discussed the eventual reduction of asset purchases that had been installed to help ease financial market conditions during the pandemic.
How are stock markets trading?
-
The Dow Jones Industrial Average
DJIA,
-0.37%
was down 94.76 points, or 0.3%, at 33,938.91. -
The S&P 500
SPX,
+0.07%
edged down 3.29 points, or 0.1%, to 4,220.41. -
The Nasdaq Composite
COMP,
+0.73%
was up 18.86 points, or 0.1%, at 14,058.54.
On Wednesday, the Dow closed 265.66 points lower to end at 34,033.67, off 0.8%, falling for a third straight session and closing below its 50-day moving average for the first time since early March. The S&P 500 index shed 22.89 points, or 0.5%, closing at 4,223.70, while the Nasdaq Composite Index slipped 33.17 points to finish at 14,039.68.
What’s driving the market?
The Fed on Wednesday tilted its outlook on inflation and interest rates and now the market needs to process what is being viewed as a slightly less accommodative stance.
“The stage is set for what I feel is a period of somewhat higher volatility as the narrative changes and traders adjust to a future reduction in liquidity conditions,” said Chris Weston, head of research at Pepperstone, in a note. “Powell et al will make it clear that any changes will be glacial and will be communicated well in advance and there is no reason to believe we’ll see a collapse in risk sentiment.”
The Fed’s updated policy outlook signals that 13 of 18 members of the Federal Open Market Committee, or FOMC, are expecting an interest-rate increase by the end of 2023, up from 7 of 18 in March and 11 see two or more hikes by that date. Seven of the Fed’s rate-setting committee expect to raise rates by the end of 2022, up from four in March.
“After dismissing rising inflation and inflation expectations for the past three months…it feels like the FOMC just put their hands back on the wheel,” wrote Aneta Markowska, economist at Jefferies, in a Wednesday note to clients.
During a news conference on Wednesday to discuss the FOMC’s moves, Powell advised that the so-called dot plot chart of members’ projections for interest rates should be taken with a grain of salt. However, the path forward is being taken by some as slightly more hawkish than a few months ago.
“It’s a technical move, but it points to the direction of travel: tighter not looser,” wrote Neil Wilson, analyst at Markets.com.
The Fed also said it was alert to the risks of high inflation, but still believes it will be mostly short-lived. The central bank moved up its inflation outlook to a 3% annual rate in 2021 but said that would likely drop sharply by next year.
“The U.S. Federal Reserve was as hawkish as it could have been in these circumstances and caught the market by surprise,” wrote Fawad Razaqzada, market analyst at ThinkMarkets, in a Thursday note.
However, the Fed said that it won’t taper its monthly buying of $80 billion of Treasurys and $40 billion of mortgage-backed securities until it sees “substantial further progress” in the economic recovery.
“Taper discussions will get more serious at the July meeting,” Markowska said. That could set the stage for the Fed to hint at those plans to reduce bond buying by the time of the Jackson Hole Symposium on Aug. 26-28, some strategists speculate.
“Our base case remains that the FOMC will formally kickoff the tapering discussion in August/September, and announce in December that tapering will start in 1Q22,” wrote analysts at UniCredit.
Meanwhile, first-time claims for unemployment benefits rose 37,000 to 412,000 in the week ended June 12 — the highest level in a month. Economists surveyed by The Wall Street Journal had forecast new claims to fall to a seasonally adjusted 365,000.
The Philadelphia Federal Reserve’s manufacturing index fell slightly in June.
Which companies are in focus?
- Shares of CureVac CVAC fell 48% on Thursday, a day after the German biotech said its COVID-19 vaccine was 47% effective in preventing the disease.
- Shares of 23andMe, the consumer genetics company that offers a home DNA test kit, will start trading on Nasdaq later Thursday, under the ticker “ME.”
- Philip Morris International Inc. PM unveiled a new structure for the Americas on Thursday and named Deepak Mishra president of the region, replacing Martin King, who is retiring after 30 years. Shares rose 0.4%.
- Shares of Commercial Metals Co. CMC were up 0.4% after the steel and metal products company reported fiscal third-quarter profit and sales that rose above expectations, citing ‘robust’ demand given “strong” construction activity.
- Verve Therapeutics Inc. VERV, is set to go public Thursday, after the Massachusetts-based biotechnology company’s upsized initial public offering priced overnight above the expected range to value the company at about $832.6 million.
- Mister Car Wash Inc. MCW, has set terms of its initial public offering, which would value the Arizona-based carwash chain at up to $5.03 billion.
What are other markets doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.538%
was flat at 1.558%. Yields and bond prices move in opposite directions. -
The ICE U.S. Dollar Index
DXY,
+0.68%,
a measure of the currency against a basket of six major rivals, jumped 0.7%. -
Oil futures erased modest, early losses, with the U.S. crude benchmark
CL00,
-0.21%
trading near unchanged, while gold futures
GC00,
-4.43%
dropped more than 4%. -
European equities were under pressure, with the pan-Continental Stoxx Europe 600
SXXP,
-0.01%
down 0.2% and London’s FTSE 100
UKX,
-0.36%
falling 0.3%. -
In Asia, the Shanghai Composite
SHCOMP,
+0.21%
rose 0.2%, while the Hang Seng Index
HSI,
+0.43%
gained 0.4% and Japan’s Nikkei 225
NIK,
-0.93%
dropped 0.9%.
