Stocks Fall as Fed Chair Powell Reiterates Hawkish Bias

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday fell -0.52%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.30%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell -1.35%.

U.S. stocks on Wednesday fell after Fed Chair Powell, in his semi-annual testimony before the House Financial Services Committee, reiterated the Fed’s hawkish bias.  Mr. Powell will appear Thursday before the Senate Banking Committee and repeat his prepared testimony, although he will answer different questions from panel members. There were no U.S. economic reports on Wednesday’s docket.

Mr. Powell’s comments Wednesday were broadly in line with his comments last week after the FOMC meeting but nevertheless disappointed the markets.  Mr. Powell said the Fed believes that higher interest rates will be needed to curb inflation.  He said the Fed remains “strongly committed to bringing inflation back down to our 2% goal.” However, he said the Fed is making decisions “meeting by meeting,” which means that a rate hike is not guaranteed for the next meeting.

The FOMC last week left its funds rate target unchanged at 5.00%/5.25%, pausing after 15 straight months of rate hikes.  However, the FOMC last week raised the median forecast for the funds rate target in its dot plot to 5.6%, which implies a further +50 bp rate hike from the current effective federal funds rate of 5.07%.  The markets are discounting the odds at 69% that the FOMC, at its next meeting on July 25-26, will raise its funds rate target by +25 bp, down from 74% odds late Tuesday.

Meanwhile, Atlanta Fed President Bostic on Wednesday was less hawkish when he said that the “bar is higher” to justify still-higher rates. He said he supports an unchanged rate and that it is prudent to give time for inflation to respond to past rate hikes. 

Overseas stock markets on Wednesday closed mixed.  The Euro Stoxx 50 closed down -0.47%.  China’s Shanghai Composite closed down -1.31%, while Japan’s Nikkei Stock Index closed up +0.56%. 

Chinese stocks Wednesday were undercut by continued disappointment that China’s State Council on Tuesday didn’t mention specific economic support measures and that the Chinese central bank cut lending rates less than expected. The PBOC on Tuesday cut the one-year and five-year loan prime rates by -10 bp, smaller than expectations for a -15 bp cut.

Today’s stock movers…

Bitcoin on Wednesday rallied sharply by +6.6% and posted a 2-month high, extending Tuesday’s rally of +5.43%.  Bitcoin rallied on the recent spate of physical bitcoin ETF applications, which suggests that Wall Street’s confidence is building that crypto will survive increased regulatory scrutiny and grow over the long-term.  Crypto stocks rallied Wednesday.  Marathon Digital (MARA) rallied +3.64%, adding to Tuesday’s surge of +17.83%.  Riot Blockchain (RIOT) rallied +3.28% Wednesday, adding to Tuesday’s surge of +8.53%.  Bit Digital (BTBT) rallied +4.13% Wednesday, adding to Tuesday’s rally of +14.97%.

Chip stocks were notable losers in the Nasdaq 100 Wednesday, with Intel (INTC) down -6.00%, AMD (AMD) down –5.73%, and Qualcomm (QCOM) down -3.39%.  Intel fell on disappointment that Intel management at an event focused on its internal foundry model did not announce any fresh product news.

Notable Nasdaq 100 winners included a +4.56% rally in Dollar Tree (DLTR), a +2.23% rally in O’Reilly Automotive (ORLY), and a +2.32% rally in Baker Hughes (BKR).

Tesla (TSLA) fell -5.46% after its recent string of gains.   A Barclays analyst Wednesday said that Tesla has rallied “too far, too fast.”  Tesla had rallied by +35% in June through Tuesday.

FedEx (FDX) fell -3.02% after company management issued 2024 earnings guidance of $16.50-$18.50 per share, with a mid-point of $17.50 that was below the market consensus of $18.31.  Also, FedEx reported sales of $21.9 billion in the quarter ending May 31, which was the third consecutive decline as package volumes declined from pandemic levels. On the positive side, fiscal Q4 earnings of $4.94 per share were above the market consensus of $4.88, although sharply below the year-earlier level of $6.87.

Amazon (AMZN) fell -1.27% after U.S. federal regulators sued Amazon over the difficulty for customers in canceling their Prime subscription.

Li Auto (LI) rallied +2.73% after Chinese electric vehicle makers saw support from the Chinese government’s extension of tax breaks through 2027 for clean-energy vehicles.

Peloton Interactive (PTON) fell -8.71% after Wolf Research downgraded its rating to underperform from peer-perform.

Across the markets…

September 10-year T-notes (ZNU23) Wednesday closed unchanged, while the 10-year T-note yield rose slightly by +0.2 bp to 3.723%.  T-notes prices initially retreated on Fed Chair Powell’s hawkish bias and the unfavorable UK inflation report, which illustrated the continued problems that the U.S. and Europe are having with inflation. 

However, T-note prices were able to recover and close the day little changed after strong demand emerged for the 20-year T-bond auction, which saw a record bid-cover ratio of 2.87 (vs the 2.64 average of the last 10 auctions).  Also on the bullish side, the 10-year inflation expectations rate fell slightly by -0.9 bp to 2.217%.

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