Markets Erase Fed-day Gains…..

U.S. equities finished solidly lower, continuing a fairly common pattern of a reversal of a move on a Fed-day, which saw equities rally yesterday after the Central Bank raised rates by 75 basis points (bps)—the largest increase since 1994—and suggested it may have to continue to be as aggressive. Schwab’s Chief Investment Strategist Liz Ann Sonders notes how following the Fed’s rate hike, concerns are elevated about a recession, which we believe is the base case. She adds that higher rates and tighter financial conditions suggest equity risk premiums are still too low, and valuations still too high. In other signs of tightening monetary policies, the Bank of England raised its benchmark interest rate by 25 bps, as expected, while the Swiss National Bank surprised the markets with a 50 bp rate hike. Treasuries were higher, with yields falling and the yield curve steepening, and the U.S. dollar tumbled, while crude oil prices rose and gold gained ground. In equity news, Abbott Laboratories had to halt production of baby formula at a plant in Michigan due to flooding, and Kroger topped earnings estimates and raised its guidance, but its margins declined more than expected. The economic calendar showed housing construction activity dropped, jobless claims moderated by a smaller amount than expected, and manufacturing output in Philadelphia unexpectedly fell into contraction territory. Europe finished broadly lower as the markets digested the monetary policy actions from around the globe, while Asia was mixed.

The Dow Jones Industrial Average fell 741 points (2.4%) to 29,927, the S&P 500 Index lost 123 points (3.3%) to 3,667, and the Nasdaq Composite plunged 453 points (4.1%) to 10,646. In heavy volume, 5.6 billion shares of NYSE-listed stocks were traded, and 5.6 billion shares changed hands on the Nasdaq. WTI crude oil was $2.27 higher to $117.58 per barrel. Elsewhere, the gold spot price rose $35.30 to $1,854.90 per ounce, and the Dollar Index lost 1.4% to 103.73.

Housing construction activity falls, jobless claims above forecasts…..

Housing starts for May fell 14.4% month-over-month (m/m) to an annual pace of 1,549,000 units, below the Bloomberg consensus estimate of a 1,693,000 unit pace, and compared to April’s upwardly-revised pace of 1,810,000 units. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dropped by 7.0% m/m to an annual rate of 1,695,000, south of expectations calling for 1,778,000 units, and compared to the upwardly-revised 1,823,000 unit pace in April.

Weekly initial jobless claims came in at a level of 229,000 for the week ended June 11, versus estimates calling for 217,000, and versus the prior week’s upwardly-revised 232,000 level. The four-week moving average rose by 2,750 to 218,500, and continuing claims for the week ended June 4 increased 3,000 to 1,312,000, versus estimates of 1,304,000. The four-week moving average of continuing claims dipped by 750 to 1,317,500.

The Philly Fed Manufacturing Business Outlook Index unexpectedly fell into contraction territory (a reading below zero) for June. The index dropped to -3.3 versus estimates of an increase to 5.0 from May’s 2.6 level. The softer-than-expected report came as new orders dropped sharply into negative territory and shipments decelerated solidly, and inventories contracted, though employment growth accelerated. Prices paid decelerated but continued to expand at a severely elevated pace.

Treasuries were higher with the yield curve steepening slightly after noticeably flattening as high inflation data forced the Fed to aggressively tighten its monetary policy with a 75 bp rate hike yesterday and signal more hikes to come.

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