Stocks Erase Early Gains on Fed Chair Powell’s Inflation Remarks

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.03%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed unchanged.  June E-mini S&P futures (ESM25) are unchanged, and June E-mini Nasdaq futures (NQM25) are down -0.02%. 

Stock indexes gave up early gains on Wednesday and closed slightly lower as hawkish comments from Fed Chair Powell sparked a wave of long liquidation in equities.  Mr. Powell warned that tariff-driven economic uncertainty and inflation risk continue to complicate the Fed’s chances to ease monetary policy.  The FOMC left interest rates unchanged following Wednesday’s policy meeting and continued to project two 25-bp rate cuts this year but cut their US growth forecast and raised their inflation forecast for this year.

Stock indexes initially moved higher on Wednesday in hopes of a de-escalation of the Israel-Iran war.  President Trump announced on Wednesday that he will convene another meeting with his national security team to discuss the ongoing conflict in the Middle East.  President Trump said Iran had reached out about the possibility of negotiations, a claim that the Iranian government later denied. Stocks also found support after US weekly jobless claims fell as expected.

Geopolitical risks are limiting the upside in stocks as hostilities between Israel and Iran entered a sixth day Wednesday with no signs of easing.  An overnight meeting between President Trump and his national security team has bolstered speculation the US is close to joining Israel’s attacks on Iran after President Trump called for Iran’s “unconditional surrender.” Iran showed no signs of backing down and reiterated an intention to respond with force if the US were to get directly involved in Israeli attacks.

So far, there’s been no closure of the vital Strait of Hormuz that handles about 20% of the world’s daily crude shipments, although navigational signals from over 900 vessels moving through the strait have been disrupted due to “extreme jamming” of signals from the Iranian port of Bandar Abbas, which caused a collision of two tankers Tuesday near the Strait of Hormuz.   

US MBA mortgage applications fell -2.6% in the week ended June 13, with the purchase mortgage sub-index down -3.0% and the refinancing mortgage sub-index down -2.1%. The average 30-year fixed rate mortgage fell -9 bp to 6.84% from 6.93% the prior week.

US weekly initial unemployment claims fell -5,000 to 245,000, right on expectations.

Wednesday’s US housing news was weaker than expected.  May housing starts fell -9.8% m/m to a 5-year low of 1.256 million, weaker than expectations of 1.350 million.  May building permits, a proxy for future construction, unexpectedly fell -2.0% m/m to a 4-3/4 year low of 1.393 million, weaker than expectations of no change at 1.422 million.

As expected, the FOMC kept the fed funds target rate unchanged at 4.25%-4.50% and said the uncertainty about the economic outlook has “diminished but remains elevated.” The statement removed the language that the committee “judges that the risks of higher unemployment and higher inflation have risen.”

The FOMC cut its US 2025 GDP estimate to 1.4% from 1.7% in March and raised its 2025 core inflation estimate to 3.1% from 2.8% in March. 

The Fed’s dot plot of interest rate projections shows the median fed funds rate forecast at the end of 2025 at 3.875%, implying two quarter-point cuts this year, the same as they expected in March.

Fed Chair Powell said, “We expect a meaningful amount of inflation in the coming months” as the increases in tariffs are likely to boost prices and that their effects on inflation could be more persistent.

Investors are bracing for negative tariff news within the next week or so following President Trump’s announcement last Wednesday that he intends to send letters to dozens of US trading partners within one to two weeks, setting unilateral tariffs ahead of the July 9 deadline that came with his 90-day pause. 

The markets are discounting the chances at 10% for a -25 bp rate cut at the July 29-30 FOMC meeting.

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 fell to a 3-1/2 week low and closed down -0.41%.  China’s Shanghai Composite closed up +0.04%.  Japan’s Nikkei Stock 225 rose to a 3-3/4 month high and closed up +0.90%.

Interest Rates

September 10-year T-notes (ZNU25) Wednesday closed down -1.5 ticks.  The 10-year T-note yield rose +0.8 bp to 4.396%.  T-notes gave up early gains on Wednesday and posted modest losses on hawkish comments from Fed Chair Powell, who said, “We expect a meaningful amount of inflation in the coming months” due to tariffs.  Mr. Powell’s comments signal the Fed is not close to cutting interest rates and were bearish for T-notes.  Wednesday’s action by the FOMC to raise its US 2025 core inflation forecast was also negative for T-note prices. 

T-notes on Wednesday initially moved higher due to carryover support from strength in European government bonds.  T-notes also found support after US May housing starts and building permits fell more than expected, dovish factors for Fed policy.  T-notes are still supported by safe-haven demand after President Trump met his national security team, fueling speculation that the US may be on the verge of joining the attack against Iran.

European government bond yields on Wednesday moved lower.  The 10-year German bund yield fell -3.8 bp to 2.497%.  The 10-year UK gilt yield fell -5.5 bp to 4.495%.

ECB Governing Council member Panetta said the Eurozone’s economic prospects face “substantial” risks due to US tariffs and the fighting in the Middle East.

UK May CPI eased to +3.4% y/y from 3.5% y/y in April, stronger than expectations of +3.3% y/y. May core CPI eased to +3.5% y/y from +3.8% y/y in April, right on expectations.

Swaps are discounting the chances at 7% for a -25 bp rate cut by the ECB at the July 24 policy meeting.

US Stock Movers

Credit card issuers and digital payment companies retreated on Wednesday, concerned that they could lose market share to stablecoins after White House crypto czar Sacks said stablecoin legislation would cause the stablecoin asset class to grow and create demand for the dollar.  As a result, Mastercard (MA) closed down more than -5% to lead losers in the S&P 500, and Visa (V) closed down more than -4% to lead losers in the Dow Jones Industrials.  Also, Corpay (CPAY) closed down more than -3%, and PayPal Holdings (PYPL) closed down more than -2%.

Bitdeer Technologies (BTDR) closed down more than -6% after announcing it was offering $300 million in convertible senior notes due 2031 in a private placement.  

Zoetis Inc (ZTS) closed down more than -3% to lead losers in the S&P 500 after Stifel downgraded the stock to hold from buy, citing “developing headwinds” for the company.

Allstate (ALL) closed down more than -1% after reporting May catastrophe losses rose +31% m/m to $777 million. 

Coinbase Global (COIN) closed up more than +16% to lead gainers in the S&P 500 after it partnered with  Nodal Clear to use USDC, the world’s second-biggest stablecoin, as collateral in US futures trading.

Marvell Technology (MRVL) closed up more than +7% to lead gainers in the Nasdaq 100 after the company raised its overall data center total addressable market to $94 billion by 2028, up from a previous estimate of $75 billion.  

Bank stocks rallied on reports that US regulators plan to ease a capital rule limiting banks’ Treasury trades.  Bank of New York Mellon (BK) and Citizens Financial Group (CFG) closed up more than +2%.  Also, JPMorgan Chase (JPM), Synchrony Financial (SYF), Northern Trust (NTRS), M&T Bank (MTB), Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), Bank of America (BAC), Morgan Stanley (MS), and US Bancorp (USB) closed up more than +1%.  In addition, Goldman Sachs (GS) closed up more than +1% to lead gainers in the Dow Jones Industrials.

Jabil (JBL) closed up +4% after Argus Research upgraded the stock to buy from hold, and Raymond James raised its price target on the stock to $230 from $170.

Nucor (NUE) closed up more than +3% to lead gainers in the S&P 500 after forecasting Q2 EPS of $2.55-$2.65, stronger than the consensus of $2.30. 

Wells Fargo & Co (WFC) closed up more than +3% after Raymond James raised its price target on the stock to $84 from $78.

Oracle (ORCL) closed up more than +1% after Guggenheim Securities raised its price target on the stock to $250 from $220. 

Earnings Reports (6/20/2025)

Accenture PLC (ACN), CarMax Inc (KMX), Darden Restaurants Inc (DRI), Kroger Co/The (KR).