Stocks Rebound, Rallying After Fed Announcement…..

U.S. equities finished higher in a turbulent session, after the Fed announced its policy decision, and the plans for the Fed’s balance sheet reduction to start on June 1st. The announced 50-bp rate hike is the largest increase in two decades and was broadly anticipated, but many investors were fearful of a more aggressive policy action in the future. In a press conference following the announcement, Fed Chairman Powell acknowledged that the labor market is tight, and inflation is much too high, but eased the fears of larger future hikes by noting that while 50-bp hikes are on the table for the next two meetings, the Committee is not actively considering larger hikes. The economic calendar was robust, showing that mortgage applications snapped a seven-week losing streak, the trade deficit swelled to a record high, and the U.S. added a smaller-than-expected number of private sector jobs during March, ahead of Friday’s labor report. Also, a couple of reads on April services sector activity came in mixed. Meanwhile, earnings season remained in focus, as Advanced Micro Devices beat expectations on a surge in revenues, while Starbucks was a penny short of expectations and it suspended its outlook due to the uncertainties overseas. Treasuries reversed to the upside following the Fed announcement, with yields falling, and the U.S. dollar was lower, while crude oil prices were higher, and gold traded to the upside. Europe saw widespread losses ahead of the Fed’s decision, while markets in Asia also lost ground in another lackluster session with markets in China and Japan remaining closed for holidays.

The Dow Jones Industrial Average rose 932 points (2.8%) to 34,061, the S&P 500 Index increased 125 points (3.0%) to 4,300, and the Nasdaq Composite advanced 401 points (3.2%) to 12,965. In heavy volume, 5.1 billion shares of NYSE-listed stocks were traded, and 5.4 billion shares changed hands on the Nasdaq. WTI crude oil gained $5.40 to $107.81 per barrel. Elsewhere, the gold spot price traded $13.70 higher to $1,884.30 per ounce, and the Dollar Index was 0.8% lower at 102.62.

Fed decision highlights robust economic calendar…..

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, raising the target for the Fed funds rate by the widely anticipated 50 basis points (bps) to a range of 0.75% to 1.00%, the biggest increase since 2000. In its statement, the Committee said that despite the downtick in economic activity in Q1, job gains have been robust, the unemployment has declined substantially, and household spending and business fixed investments continued to be strong. However, “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures”. Additionally, the statement touched on the conflict in eastern Europe, noting, “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain”. The statement noted that, “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity”. In addition, the statement also touched on Covid-related lockdowns in China, as a likely risk to exacerbate supply chain disruptions, and noted that “the Committee is highly attentive to inflation risks.” Regarding its balance sheet, the Fed said that Committee participants agreed to the plan for reducing its securities holding in a predictable manner. Starting June 1st, the Fed’s holdings of Treasury securities and agency debt and agency mortgage-backed securities will be reinvested to the extent that they exceed the monthly caps, which will be initially set at a combined level of $47.5 billion per month and will increase to $95 billion per month after three months. No updated economic projections were released at this meeting.

Shortly after the announcement in his customary press conference, Chairman Jerome Powell said that the labor market is extremely tight and inflation is much too high, but the Fed has the tools needed to restore price stability, also noting that the American economy is very strong and well positioned to handle tighter monetary policy. The Fed Chairman mentioned that 50-bp increases should be on the table for the next two meetings, but quelled fears of more aggressive action in a Q&A session by saying that 75-bp increases are not something the Fed is actively considering.

The MBA Mortgage Application Index rose 2.5% last week, following the prior week’s decrease of 8.3%. The increase snapped a seven-week losing streak for the index, as a 0.2% rise in the Refinance Index was met with a 4.1% gain in the Purchase Index. The average 30-year mortgage rate cooled from its meteoric rise, losing 1 basis point (bp) to 5.36%, but remains 219 bps above the level a year ago.

The ADP Employment Change Report showed private sector payrolls rose by 247,000 jobs in April, below the Bloomberg forecast calling for a 383,000 gain. March’s increase of 455,000 jobs was revised higher to a 479,000 increase. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader April non-farm payroll report, expected to show headline employment grew by 385,000 jobs and private sector jobs rose by 390,000. The unemployment rate is forecasted to dip to 3.5% and average hourly earnings are projected to rise 0.4% month-over-month (m/m) and be up 5.5% y/y.

The trade balance showed that the March deficit widened more than expected, rising to a record $109.8 billion, from March’s upwardly-revised deficit of $89.2 billion, and compared to forecasts of an increase to $107.1 billion. Exports rose 5.6% m/m, and imports increased 10.3%.

The April Institute for Supply Management (ISM) Services Index showed expansion in the key services sector decelerated. The index declined to 57.1, from the 58.3 in March, and versus estimates of an increase to 58.5. A reading above 50 denotes expansion in activity. Growth in business activity was offset by a decrease in new orders and a sharp drop in employment m/m, with employment crossing back into contraction territory. Meanwhile, new export orders fell, inventories rose, and prices paid jumped to a record level of 84.6. The ISM said, “Business activity remains strong; however, high inflation, capacity constraints and logistical challenges are impediments, and the Russia-Ukraine war continues to affect material costs, most notably of fuel and chemicals.”

The final April S&P Global Services PMI Index was unexpectedly revised higher to 55.6 from the preliminary 54.7 level, where it was forecasted to remain, but still below March’s reading of 58.0. A reading above 50 denotes expansion.

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