Markets Brace for Today’s Expected Fed Rate Hike

Stock and interest rate markets remain on edge ahead of this afternoon’s FOMC announcement on interest rates.  Since last Friday’s data showed U.S. May CPI rose more than expected +8.6% y/y, the fastest pace in 40 years, the markets are on guard for the Fed today to raise its federal funds target range by as much as 75 bp from the current range of 0.75%/1.00%.  

Stocks have tumbled since last Friday’s CPI data, and T-Note yields soared.  The the S&P 500 ($SPX) (SPY) fell to a 15-month low and the 10-year T-note yield climbed to an 11-year high.  Apple (AAPL), Microsoft (MSFT), and other mega-cap technology stocks have slumped as T-note yields shot higher.  Also, homebuilders and lenders have tumbled even more on expectations that higher borrowing costs will slow down the housing market.

Higher interest rates have hammered technology stocks this year, which curbs the present value of profits expected to be delivered in the future.  The tech-heavy Nasdaq 100 ($IUXX) (QQQ) is down 31% this year, and most on Wall Street don’t expect a sustained rebound in technology stocks until there are signs inflation is slowing down.  Consumer discretionary stocks are also under pressure as rising rates dampen consumer sentiment and spending.  The S&P 500 Consumer Discretionary Index ($SRCD) has tumbled 33% this year.

Rising T-note yields have also weighed on bank stocks and homebuilders.  The S&P 500 Banks Index ($DSBK) has fallen 25% this year, with all six of the largest U.S. bank stocks down by at least 20%.  Homebuilders have sunk on concerns that rising borrowing costs and elevated home prices will crimp housing demand.  Lennar (LEN), D.R. Horton (DHI), and PulteGroup (PHM) have all tumbled this year. In addition, gold mining stocks have lost their appeal as an inflation hedge as interest rates have climbed. The VanEck Gold Miners ETF (GDX) is down more than 7% this year.