Stocks Retreat as FOMC Signals Higher Interest Rates

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday fell -0.61%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.42%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell -0.79%.

Stock indexes Wednesday gave up an early rally and posted moderate losses.  Stocks retreated Wednesday afternoon after the Fed raised the federal funds target range by +50 bp, as expected, but forecast another +75 bp of rate hikes in 2023.  Stocks came off their lows after Fed Chair Powell said the Fed is getting “close” to the end of its tightening regime.

Stocks were undercut Wednesday by a slump in Charter Communications of more than -16% after it said it would spend $5.5 billion on its network to bring higher-speed broadband connections to customers. Also, Best Buy tumbled more than -3% after Bank of America downgraded the stock to underperform.  Tesla dropped more than -2% to a 2-year low after Goldman Sachs cut its price target on the stock.

Supporting stocks Wednesday was a jump of more than +5% in Moderna, which added to Tuesday’s +19% surge after it said data from a Phase 2 trial of its cancer vaccine, combined with Merck’s Keytruda, reduced deaths from melanoma. Also, Delta Air Lines rose more than +2% after it forecasted 2023 adjusted EPS above the consensus.

Despite the hawkish FOMC statement, the 10-year T-note yield fell -2.9 bp to 3.472% after Fed Chair Powell said there are "some beginning signs" of a slowdown in core services minus housing inflation and that the Fed is getting "close" to sufficiently restrictive rates.

The FOMC, as expected, raised the fed funds target range by +50 bp to 4.25%-4.50% and said "ongoing" rate increases would likely be appropriate to reach a "sufficiently restrictive" stance that returns inflation to 2% over time.

The Fed's median forecast for interest rates at the end of 2023 is now 5.125%, up from 4.625% projected in September and 75 bp above the new median federal funds rate target of 4.375%.

The FOMC lowered its 2023 U.S. GDP growth forecast to 0.4%/1.0% from a September estimate of 0.5%/1.5% and raised its 2023 core PCE range to 3.0%/3.8% from a September projection of 2.8%/3.5%.

Today’s stock movers…

Charter Communications (CHTR) closed down more than -16% to lead losers in the S&P 500 and Nasdaq 100 after saying it will spend $5.5 billion on its network to bring higher-speed broadband connections to customers.

Digital Realty Trust (DLR) closed down more than -5% after Wells Fargo Securities downgraded the stock to equal weight from overweight.

Caesars Entertainment (CZR) closed down more than -5% after Bank of America downgraded the stock to neutral from buy.

Penn Entertainment (PENN) closed down more than -4% after Bank of America downgraded the stock to neutral from overweight.   

Best Buy (BBY) closed down more than -3% after Bank of America downgraded the stock to underperform from neutral. 

Tesla (TSLA) closed down more than -2% at a 2-year low after Goldman Sachs cut its price target on the stock to $235 from $305 to reflect “softer” supply and demand.

Marriott International (MAR) closed down more than -2% after Citigroup downgraded the stock to neutral from buy.

Moderna (MRNA) closed up more than +5% Wednesday to lead gainers in the S&P 500. Moderna added to Tuesday’s 19% surge after it said data from a Phase 2 trial showed its cancer vaccine, combined with Merck’s Keytruda, reduced deaths from melanoma.

Delta Air Lines (DAL) closed up more than +2% after forecasting 2023 adjusted EPS of $3.07-$3.12, stronger than the consensus of $2.89. 

Pfizer (PFE) closed up more than +2% Wednesday after it said it entered into an agreement with China Meheco to import and distribute its Covid drug Paxlovid in China.

U.S.-listed Chinese stocks rose Wednesday on speculation the Chinese economy will soon reopen as the government continues to ease pandemic restrictions.  NetEase (NTES) closed up more than +4%.  Also, Pinduoduo (PDD) and JD.com (JD) closed up more than +1%.

Across the markets…

March 10-year T-notes (ZNH23) on Wednesday closed down -2 ticks, and the 10-year T-note yield fell -2.9 bp to 3.472%. March T-notes Wednesday gave up early gains and closed slightly lower after the FOMC raised its median forecast for interest rates at the end of 2023 to 5.125% from 4.625% projected in September. Also, Fed Chair Powell said the Fed still "has some ways to go" on interest rate hikes. 

T-notes recovered most of their losses Wednesday after Fed Chair Powell said there are "some beginning signs" of a slowdown in core services minus housing inflation and that the Fed is getting "close" to sufficiently restrictive rates.  Also, a drop in inflation expectations gave T-note prices a boost after the 10-year breakeven inflation expectations rate Wednesday fell to a 2-1/4 month low of 2.190%.

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