Stocks Fall as Powell and Yellen Disappoint

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -1.65%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.63%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.37%.

Stock indexes Wednesday gave up an early advance, whipsawed lower after the FOMC meeting, and sold off further into the close.  Stocks gave up their gains when Fed Chair Powell said we still don't have inflation progress in non-housing service prices and Fed officials "just don't" see any Fed interest rate cuts this year.  The markets have recently been expecting the Fed to start cutting rates late this year.

Stock indexes extended their losses Wednesday afternoon as bank stocks tumbled to lead the overall market lower when Treasury Secretary Yellen said U.S. regulators aren’t looking to provide “blanket” deposit insurance to stabilize the U.S. banking system.

Stock indexes initially rallied Wednesday after the FOMC raised the federal funds target range by 25 bp as expected to 4.75%-5.00% and said, "some additional policy firming may be appropriate."  Stocks also found support after the Fed kept its dot-plot of interest rate forecasts for a peak fed funds rate of 5.1% for the end of 2023, unchanged from December, signaling only one more 25 bp rate hike this year.

On the hawkish side, the Fed said it would continue with the same pace of quantitative tightening, leaving in place monthly caps of $60 billion for Treasuries that are allowed to mature without being reinvested and $35 billion for mortgage-backed securities.  Also, the Fed cut its U.S. 2023 GDP forecast to 0.4% from 0.5% in Dec and raised its 2023 core PCE forecast to 3.6% from 3.5% in Dec.

The Fed said the U.S. banking system is "sound and resilient," but the financial turmoil is "likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation" to an uncertain extent.

Global bond yields Wednesday were mixed.  The 10-year T-note yield fell -11.5 bp at 3.494%.  However, European government bond yields moved higher on hawkish comments from ECB President Lagarde and an unexpected acceleration of UK consumer prices in February.  The 10-year German bund rose +3.6 bp to 2.328%, and the 10-year UK gilt yield jumped to a 1-week high of 3.562%. 

ECB President Lagarde said, "we do not see clear evidence that underlying inflation is trending downwards," and the ECB will take a "robust" approach that allows it to respond to inflation risks as needed but also aid financial markets if threats emerge.

UK Feb CPI unexpectedly accelerated to +10.4% y/y from +10.1% y/y in Jan, stronger than expectations of an easing to +9.9% y/y.

Overseas stock markets Wednesday settled higher.  The Euro Stoxx 50 today closed up +0.34%.  China’s Shanghai Composite stock index closed up +0.31%, and Japan’s Nikkei Stock Index closed up +1.93%. 

Today’s stock movers…

First Republic Bank (FRC) closed down more than -15% to lead losers in the S&P 500 as U.S. officials discuss the possibility of government backing to encourage a deal to shore up the bank.

Bank stocks tumbled Wednesday after Treasury Secretary Yellen said the government is not considering providing “blanket” deposit insurance to stabilize the banking system.  Comerica (CMA) closed down more than -8%. Also, Lincoln National (LNC), M&T Bank (MTB), and US Bancorp (USB) closed down more than +7%. In addition, Zions Bancorp (ZION), Citizens Financial Group (CFG), and Regions Financial (RF) closed down more than -6%.  Finally, KeyCorp (KEY), Huntington Bancshares (HBAN), and Fifth Third Bancorp (FITB) closed down more than -5%.

Real estate investment trusts and real estate services companies retreated Wednesday.  Boston Properties (BXP) closed down more than -6%. Also, Digital Realty Trust (DLR) and CBRE Group (CBRE) closed down more than -5%. In addition, Alexandria Real Estate Equities (ARE) and Simon Property Group (SPG) closed down more than -4%.

Nike (NKE) closed down more than -4% to lead losers in the Dow Jones Industrials after saying it sees the fiscal year 2023 gross margins declining about 250 basis points, at the low end of a December projection for a decline of 200 to 250 basis points.

Petco (WOOF) closed down more than -17% after reporting Q4 net sales of $1.58 billion, below the consensus of $1.59 billion. 

Host Hotels & Resorts International (HST) closed down more than -4% after Compass Point Research & Trading LLC downgraded the stock to neutral from buy.

Invitations Homes (INVH) closed down more than -4% after Mizuho Securities downgraded the stock to neutral from buy.

Match Group (MTCH) closed up more than +2% to lead gainers in the S&P 500 after Jeffries said the action by Tinder to boost prices for its Tinder Plus premium service is a positive surprise and could return Tinder to at least the low teens of revenue growth by Q4 2023.

Nvidia (NVDA) closed up more than +1% after the company at its annual developer conference introduced new chips and supercomputing services that will benefit artificial intelligence.

Ollie’s Bargain Outlet Holdings (OLLI) closed up more than +9% after reporting Q4 comparable sales rose +3%, stronger than the consensus of +1.83% and forecast 2024 net sales of $2.04 billion-$2.06 billion, above the consensus of $2.01 billion.

Across the markets…

June 10-year T-notes (ZNM23) on Wednesday closed up +31 ticks, and the 10-year T-note yield fell by -11.5 bp to 3.494%.  T-note prices moved higher Wednesday after the Fed maintained its dot-plot forecast for a peak fed funds rate of 5.1% for end-2023, unchanged from December, which signals only one more 25 bp rate hike this year.  T-notes extended their gains after stocks reversed afternoon gains and sold off sharply into the close. 

On the negative side for T-notes, the Fed raised its 2023 core PCE forecast to 3.6% from 3.5% in Dec, and Fed Chair Powell said we still don't have inflation progress in non-housing service prices and Fed officials "just don't" see any Fed interest rate cuts this year.

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