Stocks Rally Following Fed Decision…..

U.S. equities finished higher, rebounding from a recent selloff that has pulled the S&P 500 into bear market territory, joining the Nasdaq and Russell 2000. The moves came after the Federal Reserve upped the target for its benchmark interest rate by the largest amount since 1994, and as the markets appeared to shrug off some soft economic data. Meanwhile, the European Central Bank (ECB) held an emergency meeting and announced measures to try to combat fragmentation in the bond markets, and the Bank of England (BoE) is set to deliver its monetary policy decision tomorrow in which it is expected to raise rates. The economic calendar was heavy today, with retail sales missing estimates, New York manufacturing output unexpectedly remaining in contraction territory, home-builder sentiment falling to a two-year low, and business inventories slowing, while import prices came in cooler than expected, and mortgage applications snapped a four-week string of declines. In light equity news, Hertz Global announced a new share repurchase program. Treasuries accelerated to the downside after the Fed’s decision, particularly at the short-end of the curve, with rates retreating from a recent jump, and the U.S. dollar pared back from a rally as of late. Crude oil prices were lower, and gold rose. Europe finished higher after the ECB’s meeting and ahead of the BoE’s decision, while Asia was mixed, with markets in China and Hong Kong rising following upbeat data in the region.

The Dow Jones Industrial Average rose 304 points (1.0%) to 30,669, the S&P 500 Index gained 55 points (1.5%) to 3,790, and the Nasdaq Composite advanced 271 points (2.5%) to 11,099. In heavy volume, 5.5 billion shares of NYSE-listed stocks were traded, and 5.3 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $3.62 to $115.31 per barrel. Elsewhere, the gold spot price rose $21.20 to $1,834.70 per ounce, and the Dollar Index lost 0.6% to 104.86.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, raising the target for the Fed funds rate by 75 basis points (bps) to a range of 1.50% to 1.75%, the largest incremental increase since late 1994. Despite the sharp increase, the Committee painted an optimistic picture of the economy, noting that, “Overall economic activity appears to have picked up after edging down in the first quarter,” and “Job gains have been robust in recent months, and the unemployment rate has remained low.” But it did note that inflation remains elevated, citing supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The statement also noted that the continued war in Ukraine is creating additional upward pressure on inflation and weighing on economic activity globally, and the COVID-related lockdowns in China are likely to exacerbate the ongoing supply chain disruptions. Regarding its balance sheet, the Fed said it will maintain its plans of reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities that it released in May. The decision was almost unanimous, with Kansas City Fed President Esther George the lone dissenter, preferring a smaller 50-bp increase.

The Committee also provided updated economic projections, showing a sharp downward adjustment to GDP for this year to 1.7% growth from March’s projection of 2.8%, while moving its forecast for growth in 2023 downward by 0.5% to a rate of 1.7% and 2024 to 1.9% from March’s estimate of 2.0%. Regarding inflation, its outlook for this year was adjusted upward to an increase of 5.2% from the previous estimate of 4.3%, while figures for 2023 and 2024 saw slight upward revisions. In the Committee’s “dots plot”—participants’ assessment of interest rates going forward—the majority of the Members expect the benchmark rate will end the year at 3.4%, well above its 1.5% March estimate, and rise to 3.8% year-end in 2023.

Shortly after the announcement in his customary press conference, Chairman Jerome Powell said that the labor markets remain tight and he would like to see it in better balance, and that inflation is too high, with last week’s Consumer price index report a driver that prompted the Committee to feel it needed to do “more front-loading” in regards to interest rate increases. Powell also indicated that further rate increases of between 50 bps and 75 bps are “most likely” at the upcoming meetings, but reiterated that such decision will be data-dependent. Get more insight on the Fed’s decision from Schwab’s Liz Ann Sonders later today on our Insights & Education page.

Advance retail sales for May declined 0.3% month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.1% rise, and compared to April’s downwardly-adjusted 0.7% increase. Last month’s sales ex-autos rose 0.5% m/m, compared to expectations of a 0.7% gain and as April’s figure was revised lower to a 0.4% increase. Sales ex-autos and gas were up 0.1% m/m, below estimates of a 0.4% rise, while April’s reading was adjusted downward to a 0.8% increase. The control group, a figure used to calculate GDP, came in flat m/m, versus projections of a 0.3% increase, and following April’s negatively-revised 0.5% rise.

The MBA Mortgage Application Index gained 6.6% last week, following the prior week’s decrease of 6.5%. The index snapped a string of four weekly declines as a 3.7% increase in the Refinance Index was accompanied by an 8.1% rise for the Purchase Index. The rebound came even as the average 30-year mortgage rate rose 25 basis points (bps) to 5.65%, and is up 254 bps versus a year ago.

The Empire Manufacturing Index, a measure of activity in the New York region, showed the index improved but remained at a level depicting contraction (a reading below zero) last month. The index increased to -1.2 in June from -11.6 that was posted in May and compared to estimates of a rise to 2.3. However, new orders moved back into expansion territory, along with shipments, but unfilled orders fell into contraction territory. Prices paid decelerated but remained severely elevated, and employment growth accelerated.

The Import Price Index rose 0.6% month-over-month (m/m) for May, versus estimates of a 1.1% gain, and compared to April’s upwardly-revised 0.4% rise. Versus last year, prices were up by 11.7%, compared to forecasts of an 11.9% increase and April’s upwardly-revised 12.5% rise.

The National Association of Home Builders (NAHB) Housing Market Index (HMI) showed home-builder sentiment in June slid to 67—a two-year low—from May’s unrevised 69 level, in line with estimates. The NAHB said, “Six consecutive monthly declines for the HMI is a clear sign of a slowing housing market in a high inflation, slow growth economic environment,” The NAHB added that, “The entry-level market has been particularly affected by declines for housing affordability and builders are adopting a more cautious stance as demand softens with higher mortgage rates.”

Business inventories rose 1.2% m/m in April, matching forecasts, after March’s upwardly-revised increase of 2.4%.

Treasuries were lower following the Fed’s decision, as the yield on the 2-year Treasury note was down 19 bps to 3.24%, the yield on the 10-year note lost 5 bps to 3.33%, and the 30-year bond rate declined 7 bps to 3.36%.

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