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Stocks rise as bigger US Fed hike ‘baked into’ prices

Stocks climbed, Treasury yields sank and the dollar stabilized, with traders betting the Federal Reserve will deliver its biggest rate hike in almost three decades to curb rampant inflation and avoid steeper tightening down the road.

The S&P 500 rebounded after its worst five-day rout since the onset of the pandemic, while the tech-heavy Nasdaq 100 outperformed. Parts of the fixed-income market are signaling confidence in the Fed’s effort to fight price pressures. The 10-year breakeven rate on Treasury inflation protected securities — or the difference between those yields and the ones on typical government bonds — dropped. The flattening curve is sending the same message.

Money markets and giants including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc see the Fed boosting rates by 75 basis points, the first such hike since 1994. The decision is due at 2 pm in Washington, with Chair Jerome Powell’s press conference 30 minutes later. While Powell in May signaled half-point moves this month and in July, inflation surprises to the high side spurred bets on a bigger increase.

For that reason, the highly scrutinized dot plot, which the central bank uses to signal its outlook for the rate path, may not reflect the latest thinking by Fed officials — given that participants had to submit their projections before this week’s market developments.

“We expect a 75-basis-point hike. We would say that’s baked into the market,” said Anna Han, equity strategist at Wells Fargo Securities. “We want to have confidence in the Fed, we want to believe that they’re seeing what we’re seeing and that they’re not going to let inflation run away to their best ability starting now.”

Sam Zell, founder of Equity Group Investments, told CNBC that if he were the chairman of the Fed, he would raise rates by a full point Wednesday, echoing comments a day earlier by Bill Ackman, the founder of Pershing Square Capital Management. Ackman said officials would be better off by raising rates 100 basis points this month as well as “in July and thereafter.”

More comments:

  • “A more aggressive hike by the Fed today will help the markets bounce over the near-term,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Yes, that bounce might not take place immediately, but given that the stock market is getting oversold and sentiment has become very bearish, we think a more than 50-basis-point hike should lead to a bounce before too long.”
  • “While markets now expect a 75-basis-point rate hike by the Fed, the press conference following the release of the statement this afternoon will help analysts assess the Fed’s ability to navigate Chairman Powell’s so-called ‘softish’ landing as it takes a more aggressive approach in stanching inflation,” said Quincy Krosby, chief equity strategist for LPL Financial.
  • “Market pricing is likely near an extreme right now, but the Fed needs to signal that it is serious about tackling inflation,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.
  • “The Fed is likely to bow to pressure and match market expectations with a hike of 75 basis points,” said Fawad Razaqzada, market analyst at City Index and FOREX.com. “The Fed remains head-and-shoulders above other major central banks in terms of hawkishness.”

If recent history is any guide, the Fed meeting potentially offers a chance for stocks to enjoy a little rally. Over the past year, the S&P 500 moved higher after six out of eight Fed rate decisions. In January and March, stocks rose about six per cent and nine per cent in the days following the central bank’s gatherings — rebounding from steep losses leading into the announcements.

On the economic front, US homebuilder sentiment slide to a two-year low in June as rising inflation and higher mortgage rates weighed on demand. Retail sales fell in May for the first time in five months. A gauge of New York state manufacturing activity unexpectedly contracted for a second month in June, while a measure of inflationary pressures at producers picked up.

Elsewhere, the European Central Bank accelerated work on a new tool to combat unwarranted jumps in euro-area bond yields as markets strain at the prospect of the first rate increases in more than a decade.

Meantime, Bitcoin tumbled again, driving the token to the brink of US$20,000 as evidence of deepening stress within the crypto industry kept piling up.

Key events this week:

  • Bank of England rates decision, Thursday.
  • US housing starts, initial jobless claims, Thursday.
  • Bank of Japan policy decision, Friday.
  • Eurozone CPI, Friday.
  • US Conference Board leading index, industrial production, Friday

Some of the main moves in markets:

Inventory

  • The S&P 500 rose one per cent as of 12:42 pm New York time
  • The Nasdaq 100 rose 1.6 per cent
  • The Dow Jones Industrial Average rose 0.6 per cent
  • The MSCI World index rose 0.8 per cent

Currencies

  • The Bloomberg Dollar Spot Index was little changed
  • The euro fell 0.3 per cent to US$1.0389
  • The British pound rose 0.5 per cent to US$1.2059
  • The Japanese yen rose 0.7 per cent to 134.50 per dollar

Leaps

  • The yield on 10-year Treasuries declined eight basis points to 3.39 per cent
  • Germany’s 10-year yield declined 11 basis points to 1.64 per cent
  • Britain’s 10-year yield declined 12 basis points to 2.47 per cent

Commodities

  • West Texas Intermediate crude fell 1.1 per cent to US$117.58 a barrel
  • Gold futures rose 0.6 per cent to US$1,823.80 an ounce

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