Stocks Tumble In Wake Of Fed Decision…..

U.S. equities finished solidly lower in the wake of the Fed’s decision to increase the target for the fed funds rate by 75 basis points for a third-straight meeting. The Committee also upped its projection for the peak in the benchmark rate to 4.6% by year-end 2024, well above earlier projections. An escalation in the war in Ukraine didn’t help matters, as Russian President Putin called to partially mobilize more troops to the region and reiterated his nuclear weapon threat. Treasury yields finished mixed, with the 2-year note paring back from hitting 4.11% following the announcement, and the U.S. dollar spiked, hitting a fresh 20-year high. Crude oil prices were lower, and gold gained ground. In light equity news, General Mills topped earnings estimates and raised its full-year guidance. Housing was also in focus, with existing home sales down for a seventh-straight month, though mortgage applications snapped a five-week losing streak despite the continued surge in mortgage rates. Europe finished mixed and Asia finished broadly lower, as the global markets treaded cautiously ahead of today’s Fed announcement.

The Dow Jones Industrial Average declined 522 points (1.7%) to 30,184, the S&P 500 Index decreased 66 points (1.7%) to 3,790, and the Nasdaq Composite was 205 points (1.8%) lower at 11,220. In moderate volume, 4.0 billion shares of NYSE-listed stocks were traded, and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.00 to $82.94 per barrel. Elsewhere, the gold spot price rose $9.10 to $1,680.20 per ounce, and the Dollar Index rallied 1.0% to 111.25.

Fed hikes 75 bps, existing home sales dip, mortgage apps snap losing streak…..

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 3.00% to 3.25%, the third increase of that magnitude in as many meetings. In its statement, the Committee noted that spending and production have indicated modest growth, job gains remain robust and the unemployment rate continues to be low. However, inflation remains elevated, citing supply and demand imbalances related to the pandemic, as well as higher energy and food prices. The statement also noted that the continued war in Ukraine is creating additional upward pressure on inflation and weighing on economic activity globally. 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 unanimous among Committee members.

The Committee also provided updated economic projections, showing a sharp downward adjustment to GDP for this year to 0.2% growth from June’s projection of 1.7%, while moving its forecast for growth in 2023 downward to a rate of 1.2% from 1.7%, and 2024 to 1.7% from June’s estimate of 1.9%. Regarding inflation, its outlook for this year was adjusted upward to an increase of 5.4% from the previous estimate of 5.2%, while figures for 2023 and 2024 saw slight upward revisions as well. The Committee also upped its projections for the unemployment rate by only 0.1% for this year to 3.8%, but adjusted its estimate upward to 4.9% for 2024 from June’s projection to 4.4%, and 2025 to a level of 4.4% from the June estimate of 4.0%. In the Committee’s “dots plot”—participants’ assessment of interest rates going forward—the majority of the Members expect the benchmark rate will be 125 bps higher by year-end and peak at 4.6% by the end of 2023, sharply higher than its June’s projection of 3.8%, but for rates to decline in 2025 to 3.9%.

Shortly after the announcement in his customary press conference, Chairman Jerome Powell said that the labor market remains tight and he would like to see it in better balance, and that inflation is still too high, and as such further rate increases are likely appropriate at the upcoming meetings. He noted that the Committee wants to see clear evidence that inflation is moving back toward its goal of 2% and that it likely will take time to assess such, saying the moves so far can be viewed “at the lowest level of restriction” currently. However, he reiterated that such decisions will be data-dependent. Get more insight on the Fed’s decision from Schwab’s Kathy Jones later today on our Insights & Education page.

Existing home sales were down 0.4% month-over-month (m/m) in August to an annual rate of 4.80 million units, above the Bloomberg consensus estimate of a 2.3% decrease to a 4.70-million-unit pace, while July’s figure was adjusted slightly higher to 4.82 million units. Contract closings fell for the seventh-straight month, remain at the lowest level since May 2020 and are down nearly 20.0% versus a year ago. M/M sales varied across the four major regions, with sales in the Northeast and West growing, and sales in the South flat, while sales in the Midwest fell.

The median existing home price was up 7.7% from a year ago to $389,500—marking the 126th straight y/y gain—but was the second month in a row that the median sales price decelerated from the record high of $413,800 in June. The number of homes for sale declined from last month, and at the current sales pace, it would take 3.2 months to sell all the houses on the market, after five successive monthly increases, but up from the 2.6 months pace in the same period last year.

National Association of Realtors Chief Economist Lawrence Yun said, “The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes.” Yun went on to say, “The softness in home sales reflects this year’s escalating mortgage rates. Nonetheless, homeowners are doing well with near nonexistent distressed property sales and home prices still higher than a year ago.” Existing home sales account for a large majority of the home sales market and reflect contract closings instead of signings.

In other housing news, the MBA Mortgage Application Index rose 3.8% last week, following the prior week’s decrease of 1.2%. The index snapped a string of five-straight weekly declines as a 10.4% jump for the Refinance Index was accompanied by a 1.0% rise for the Purchase Index. The increase came even as the average 30-year mortgage rate advanced 24 basis points (bps) to 6.25%, which is up 322 bps versus a year ago.

Treasury yields were mixed following the Fed’s announcement, as the yield on the 2-year note rose 1 bp to 4.01%, while the yield on the 10-year note fell 6 bps to 3.51%, and the 30-year bond rate declined 9 bps to 3.49%.

©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.