Stocks Rally as Fed Chair Powell Soothes Markets

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +1.46%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.00%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.49%. 

Stocks on Wednesday rallied moderately as a decline in T-note yields sparked short-covering in stocks.  The 10-year T-note yield fell -10.1 bp to 3.372% on positive carry-over from a rally in European government bonds.  Stock indexes extended their gains Wednesday afternoon, even after the Fed hiked interest rate by 75 bp, because Fed Chair Powell downplayed expectations for more aggressive Fed rate hikes in the future when he said the next policy move by the FOMC at its July meeting will be a 50 bp or 75 bp rate hike.  Stocks rose Wednesday despite weaker-than-expected U.S. economic data.

Stock indexes opened higher Wednesday as a decline in European government bond yields pushed T-note yields lower.  The 10-year German bund yield Wednesday fell from an 8-year high of 1.772% and dropped -11.4 bp to 1.644% when the ECB announced after an emergency meeting Wednesday that it will accelerate work on a new tool to combat unwarranted jumps in European bond yields.  The ECB said it is studying whether to use the reinvestment of bond purchases conducted under the now-halted pandemic emergency purchase program (PEPP) to slow soaring bond yields. 

U.S. stocks also garnered support from Wednesday’s rally in the Shanghai Composite to a 3-1/4 month high.  Better-than-expected Chinese economic data Wednesday was supportive of global growth prospects and stocks.   China's May industrial production unexpectedly rose +0.7% y/y, stronger than expectations of -0.9% y/y.  Also, China's May retail sales fell -6.7% y/y, a smaller decline than expectations of -7.1% y/y.

The FOMC voted 10-1 to raise the fed funds target range by 75 bp to 1.50%-1.75% and projected that the funds rate will rise to 3.4% by year-end, implying another 175 bp of tightening this year.  The FOMC said it began shrinking its balance sheet on June 1 by $47.5 billion a month and will expand that to $95 billion a month in September.

The FOMC said it "anticipates that ongoing increases in the fed funds target range will be appropriate, and the committee is strongly committed to returning inflation to its 2% objective."

The FOMC cut its U.S. 2022 GDP estimate to 1.7% from a March projection of 2.8% and raised its 2022 personal consumption expenditures price index to 5.2% from a March estimate of 4.3%.

U.S. May retail sales unexpectedly fell -0.3% m/m, weaker than expectations of +0.1% m/m.  May retail sales ex-autos rose +0.5% m/m, weaker than expectations of +0.7% m/m.

The U.S. Jun Empire manufacturing survey general business conditions index rose +10.4 to -1.2, weaker than expectations of 2.3.

The U.S. May import price index ex-petroleum unexpectedly fell -0.1% m/m, weaker than expectations of +0.6% m/m and the first decline in 19 months.

The U.S. Jun NAHB housing market index fell -2 to a 2-year low of 67, right on expectations.

Today’s stock movers…

A decline in T-note yields supported a rally in technology stocks.  Netflix (NFLX) and Atlassian Corp Plc (TEAM) closed up more than +7%.  Also, Amazon.com (AMZN), Tesla (TSLA), Splunk (SPLK), and Okta (OKTA) closed by more than +5%.  In addition, Nvidia (NVDA), Intuit (INTU), and Zscaler (ZS) closed up by more than +4%. 

Boeing (BA) closed up more than +9% Wednesday and led gainers in the S&P 500 and the Dow Jones Industrials.  Boeing extended Tuesday’s +5% advance on positive carry-over from Tuesday when the Seattle Times reported that Boeing might resume 787 Dreamliner deliveries in the coming weeks, citing a Federal Aviation Administration official.

MercadoLibre (MELI) closed up more than +9% Wednesday to lead gainers in the Nasdaq 100 after Mexican retailer Chedraui said it opened a store on the MercadoLibre platform to sell groceries.

Moderna (MRNA) closed up more than +5% Wednesday after an FDA advisory panel gave a unanimous verdict in favor of the company’s Covid vaccine for children.”

A decline of more than -3% in crude oil prices Wednesday weighed on energy stocks and energy service providers.  Valero Energy (VLO) closed down by more than -4% to lead losers in the S&P 500.  Also, Schlumberger (SLB), Marathon Petroleum (MPC), Devon Energy (DVN), and Baker Hughes (BKR) closed down by more than -3%.  In addition,  Marathon Oil (MRO), Occidental Petroleum (OXY), Diamondback Energy (FANG), and Hess Corp (HES) closed down by -2%.   

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed up by +24 ticks, and the 10-year T-note yield fell -10.1 bp to 3.372%.  A rally in European government bonds Wednesday sparked short-covering in T-notes.  The 10-year German bund yield Wednesday retreated from an 8-year high and fell -14.1 bp at 1.616% after the ECB announced after an emergency meeting Wednesday that it will accelerate work on a new tool to combat unwarranted jumps in European bond yields.  T-notes also found support from Wednesday’s U.S. economic data that showed May retail sales unexpectedly fell and May import prices ex-petroleum unexpectedly declined. 

Gains in T-notes accelerated Wednesday afternoon, despite the FOMC raising the fed funds target range by 75 bp, after Fed Chair Powell downplayed expectations for a more aggressive Fed when he said the next policy move by the FOMC at its July meeting will be a 50 bp or 75 bp rate hike.