NYSE MAC Desk
Fed Recap:
STRAIGHT FROM THE TRADING FLOOR
by Michael Reinking, Sr. Market Strategist
May 3, 2023 5:00 PM ET
DOW 33,414 (-270), S&P 500 4,091 (-29), Russell 2000 1,739 (+7), NYSE FANG+ 5,981 (-70), ICE Brent Crude $71.93/barrel (-$3.39), Gold $2,049/oz (+$26), Bitcoin ~28.6k (-205)
As was widely expected, for the 10th consecutive meeting, the Federal Reserve raised rates bringing the upper end of the Fed Funds target to 5.25%. A level that was in line with median staff projection for 2023 in the March Summary of Economic Projections. Within the statement there was a slight downgrade to the language describing economic activity. The big change to the statement was that the following line was completely removed from the statement, “ The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”. The next sentence was also updated from “In determining the extent of future increases in the target range” changing to the “extent to which additional policy firming may be appropriate”. This was a clear signal by the Committee that it is nearing the end of the cycle. Markets had been looking for some signal of a pause and that was what they got. As such the moves following the statement were pretty muted.
Chair Powell took center stage and his prepared remarks began with commentary suggesting that conditions in the banking sector had improved since their last meeting. He went on to say that the First Republic deal was “an important step toward drawing a line under that period of severe stress”, spoiler alert there is some irony in that given the news out after the close. Throughout the press conference he acknowledged that credit conditions have been tightening, this will get worse in light of the current situation and will weigh on economic activity, but quantifying how much is difficult.
In regard to the labor market, he said it remained tight but suggested there were some signs it was coming back into balance while also pointing to some easing in wages. He acknowledged some moderation in inflation but that it still had a long way to go and went out of the way to say that the Fed expects this to take some time to come back to their target and if that is the case rate cuts would not be appropriate, this was the line that markets seemed to key on for some of the weakness.
He said there was broad support for today’s hike and that discussions around a pause were more about upcoming meetings not today. There were multiple references to the fact that we were closer to the end of the tightening cycle than the beginning and at one point he even said we are “maybe even there”. He did try to balance that by saying we are prepared to do more, decisions would be made on a meeting to meeting basis, and would be data dependent. After today it seems clear that the onus is now on that data to show more tightening is necessary as opposed to vice-versa.
I’d say today was largely in line with what most had been expecting to hear. The reaction within financial markets was pretty muted. This was only the second meeting since the start of the tightening cycle where the S&P 500 did not end the day +/- at least 1% (see Table below).
The S&P 500 ended down ~0.7% right at yesterday’s lows. Yields were down 3-10bps with some steepening of the curve. Futures markets did price back in a ~10% chance of an additional hike next month after this moved to 0% yesterday. The central tendency for rates at year end is ~4.5% which is where it has been for most of the last week (the divide remains). After failing to hold above $102 again yesterday the US dollar index was down ~0.6% to $101.13 holding just above the recent lows (~$100.50). The other really notable move today was the continued weakness in oil with ICE Brent closing down ~4.5% to ~$72 which was just above the March low ($70.10).
Since today may have been the last hike in this cycle we’ve included a table below looking at S&P 500 performance following the final hike in the last four tightening cycles.
What’s on Tap Tomorrow?
As I was wrapping up there are reports that PacWest Bancorp, another California regional bank, is seeking strategic alternatives which has the stock down well over 25% while the regional bank ETF is down ~4%. S&P futures have extended modestly to the downside while gold is also catching a risk-off bid up ~1.3% to $2,050 (YTD high ~2,063).
It was already setting up to be a very busy day tomorrow. As we’ve seen over the last year that the moves in the days following the Fed decision have been quite large. Outside of digesting the Fed decision and this most recent banking news there will be rate decisions from the ECB and Norway. It will another be a very busy day of earnings including from Apple after the close. Overnight the economic data includes China Manufacturing PMIs and EU PPI. In the US the key economic data will be related to the labor market with claims and the Challenger job cuts which come a day before the BLS Employment report.
Earnings
Post-Market: AEIS, ALB, ALL, ATUS, AMED, ANSS, HOUS, APA, ATO, AVT, BHE, BKH, SQ, CPE, CENT, CHRD, COKE, CTSH, CODI, CXW, CTVA, CCRN, CW, DCP, NVST, EQIX, EQH, ETSY, ES, EVH, FG, FMNB, FNF, FLT, GNW, GL, HCC, HST, HUBS, IOSP, MRO, MATV, MMS, MELI, MET, MKSI, MOS, NFG, NE, NUS, OPAD, PARR, PDCE, PAGP, PSA, QGEN, QRVO, QCOM, O, REZI, RHP, SIGI, SEDG, RUN, TWI, TRIP, TTEC, TTMI, UGI, ULCC, VAC, VSTO, WTS, WERN, WES, WMB, YELL, ZG
Pre-Market: AEP, APG, APTV, ARW, ATI, AAWW, BALL, BHC, BDX, BERY, BWA, BRKR, CAH, CG, COMM, COP, DDOG, DLX, DNB, DINO, DNOW, ERJ, RACE, FOCS, GCI, GOLF, GTES, GPRE, HII, IEP, IBP, ICE, IRM, ITRI, ITT, JLL, K, KTB, LAMR, LANC, MMP, MLM, MDU, MLCO, MRNA, MODV, NFE, NJR, NRG, NS, OGE, ONEW, OPCH, OGN, PZZA, PARA, PH, PTON, PENN, PCG, PNW, PLTK, PPL, PRMW, PWR, RCM, REGN, RITM, RCL, SABR, SBH, SRE, SWK, STWD, SPH, TRGP, TFX, TIXT, BLD, UPBD, VNT, VMC, W, WCC, WLK, WLKP, WRK, WOW, XPO, XYL, ZTS
Post-Market: AEE, AIG, COLD, AMN, AAPL, BECN, BIO, BCC, CVNA, CNXN, COIN, CTRA, CWK, DASH, DBX, ED, EOG, EXPE, FND, FTNT, KE, LYV, LYFT, MTZ, MATX, MERC, MCHP, MPWR, MNST, MSI, NCR, NWSA, OPEN, OEC, POST, KWR, RRR, RRX, RGA, RKT, SEM, SHOP, TDS, TEAM, TXRH, TPC, USM, USX, YELP, ZEUS
Technicals/Sectors/Other Assets:
As we’ve been highlighting coming out of a period of range contraction we were looking for some range expansion and a return of volatility. The index made a slightly higher high on Monday before yesterday’s selloff. Today we closed below 4,100 and right at yesterday’s lows. The first level to watch to the downside tomorrow would be between 4,035-4,050 last week’s low/the 50d ma.
- Fed hikes by 25bps to 5.25%
- Tightening Cycle Over?
- Equities close on the lows
- Another one bites the dust?
- Yields move lower
- Oil gets slammed
As was widely expected, for the 10th consecutive meeting, the Federal Reserve raised rates bringing the upper end of the Fed Funds target to 5.25%. A level that was in line with median staff projection for 2023 in the March Summary of Economic Projections. Within the statement there was a slight downgrade to the language describing economic activity. The big change to the statement was that the following line was completely removed from the statement, “ The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”. The next sentence was also updated from “In determining the extent of future increases in the target range” changing to the “extent to which additional policy firming may be appropriate”. This was a clear signal by the Committee that it is nearing the end of the cycle. Markets had been looking for some signal of a pause and that was what they got. As such the moves following the statement were pretty muted.
Chair Powell took center stage and his prepared remarks began with commentary suggesting that conditions in the banking sector had improved since their last meeting. He went on to say that the First Republic deal was “an important step toward drawing a line under that period of severe stress”, spoiler alert there is some irony in that given the news out after the close. Throughout the press conference he acknowledged that credit conditions have been tightening, this will get worse in light of the current situation and will weigh on economic activity, but quantifying how much is difficult.
In regard to the labor market, he said it remained tight but suggested there were some signs it was coming back into balance while also pointing to some easing in wages. He acknowledged some moderation in inflation but that it still had a long way to go and went out of the way to say that the Fed expects this to take some time to come back to their target and if that is the case rate cuts would not be appropriate, this was the line that markets seemed to key on for some of the weakness.
He said there was broad support for today’s hike and that discussions around a pause were more about upcoming meetings not today. There were multiple references to the fact that we were closer to the end of the tightening cycle than the beginning and at one point he even said we are “maybe even there”. He did try to balance that by saying we are prepared to do more, decisions would be made on a meeting to meeting basis, and would be data dependent. After today it seems clear that the onus is now on that data to show more tightening is necessary as opposed to vice-versa.
I’d say today was largely in line with what most had been expecting to hear. The reaction within financial markets was pretty muted. This was only the second meeting since the start of the tightening cycle where the S&P 500 did not end the day +/- at least 1% (see Table below).
The S&P 500 ended down ~0.7% right at yesterday’s lows. Yields were down 3-10bps with some steepening of the curve. Futures markets did price back in a ~10% chance of an additional hike next month after this moved to 0% yesterday. The central tendency for rates at year end is ~4.5% which is where it has been for most of the last week (the divide remains). After failing to hold above $102 again yesterday the US dollar index was down ~0.6% to $101.13 holding just above the recent lows (~$100.50). The other really notable move today was the continued weakness in oil with ICE Brent closing down ~4.5% to ~$72 which was just above the March low ($70.10).
Since today may have been the last hike in this cycle we’ve included a table below looking at S&P 500 performance following the final hike in the last four tightening cycles.
What’s on Tap Tomorrow?
As I was wrapping up there are reports that PacWest Bancorp, another California regional bank, is seeking strategic alternatives which has the stock down well over 25% while the regional bank ETF is down ~4%. S&P futures have extended modestly to the downside while gold is also catching a risk-off bid up ~1.3% to $2,050 (YTD high ~2,063).
It was already setting up to be a very busy day tomorrow. As we’ve seen over the last year that the moves in the days following the Fed decision have been quite large. Outside of digesting the Fed decision and this most recent banking news there will be rate decisions from the ECB and Norway. It will another be a very busy day of earnings including from Apple after the close. Overnight the economic data includes China Manufacturing PMIs and EU PPI. In the US the key economic data will be related to the labor market with claims and the Challenger job cuts which come a day before the BLS Employment report.
Earnings
Post-Market: AEIS, ALB, ALL, ATUS, AMED, ANSS, HOUS, APA, ATO, AVT, BHE, BKH, SQ, CPE, CENT, CHRD, COKE, CTSH, CODI, CXW, CTVA, CCRN, CW, DCP, NVST, EQIX, EQH, ETSY, ES, EVH, FG, FMNB, FNF, FLT, GNW, GL, HCC, HST, HUBS, IOSP, MRO, MATV, MMS, MELI, MET, MKSI, MOS, NFG, NE, NUS, OPAD, PARR, PDCE, PAGP, PSA, QGEN, QRVO, QCOM, O, REZI, RHP, SIGI, SEDG, RUN, TWI, TRIP, TTEC, TTMI, UGI, ULCC, VAC, VSTO, WTS, WERN, WES, WMB, YELL, ZG
Pre-Market: AEP, APG, APTV, ARW, ATI, AAWW, BALL, BHC, BDX, BERY, BWA, BRKR, CAH, CG, COMM, COP, DDOG, DLX, DNB, DINO, DNOW, ERJ, RACE, FOCS, GCI, GOLF, GTES, GPRE, HII, IEP, IBP, ICE, IRM, ITRI, ITT, JLL, K, KTB, LAMR, LANC, MMP, MLM, MDU, MLCO, MRNA, MODV, NFE, NJR, NRG, NS, OGE, ONEW, OPCH, OGN, PZZA, PARA, PH, PTON, PENN, PCG, PNW, PLTK, PPL, PRMW, PWR, RCM, REGN, RITM, RCL, SABR, SBH, SRE, SWK, STWD, SPH, TRGP, TFX, TIXT, BLD, UPBD, VNT, VMC, W, WCC, WLK, WLKP, WRK, WOW, XPO, XYL, ZTS
Post-Market: AEE, AIG, COLD, AMN, AAPL, BECN, BIO, BCC, CVNA, CNXN, COIN, CTRA, CWK, DASH, DBX, ED, EOG, EXPE, FND, FTNT, KE, LYV, LYFT, MTZ, MATX, MERC, MCHP, MPWR, MNST, MSI, NCR, NWSA, OPEN, OEC, POST, KWR, RRR, RRX, RGA, RKT, SEM, SHOP, TDS, TEAM, TXRH, TPC, USM, USX, YELP, ZEUS
Technicals/Sectors/Other Assets:
As we’ve been highlighting coming out of a period of range contraction we were looking for some range expansion and a return of volatility. The index made a slightly higher high on Monday before yesterday’s selloff. Today we closed below 4,100 and right at yesterday’s lows. The first level to watch to the downside tomorrow would be between 4,035-4,050 last week’s low/the 50d ma.
- US - 2yr -16bps to 3.82%, 5yr -5bps to 3.41%, 10yr -4bps to 3.40%, 30yr -2bps to 3.72%
- USD index: -$0.69 to $101.04
- VIX: +0.56 to 18.34
- Bitcoin: -0.7% to ~28.6k
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