The Federal Reserve made its July monetary policy decision and the U.S. equity market rallied forcefully yesterday afternoon in response. The central bank raised the benchmark short-term interest rate by 0.75%, a move that was not a surprise and already priced into the market. That, along with comments from Federal Reserve Chairman Jerome Powell that were deemed to be a little bit more dovish than many pundits expected (more below) ignited the buying spree that saw the NASDAQ Composite jump more than 4%.
Before we delve further into yesterday’s Fed news, we did get some important reports on the U.S. economy and batch of quarterly reports since yesterday’s closing bell. On the economic front, the initial reading on second-quarter GDP came at 8:30 A.M. (EDT), with the Commerce Department reporting that output contracted at an annualized clip of 0.9% during the three-month period. It marked the second-consecutive quarterly decline, which many pundits consider to be a recession. Meanwhile, initial unemployment claims for the week ending July 23rd came in at 256,000, which was down 5,000 from the upwardly revised previous week’s figure. These figures were taken in stride by investors, as most market watchers appear to be pricing in a modest recession into their forecasts. The equity futures, which were modestly lower heading into the GDP report, did not move much on the news.
Our sense is that the June personal income and spending report (due tomorrow morning at 8:30 A.M. EDT), may have a bigger impact on trading, as it will include the latest personal consumption expenditures (PCE) reading. Chairman Powell reiterated during yesterday’s press conference that the PCE data is still viewed as a better gauge of overall inflation than the producer and consumer pricing reports.
Meantime, the second-quarter earnings news has not been as painful as the market anticipated coming into the reporting season. A number of companies have offered enough hope in their outlooks to quell some of the concerns on Wall Street. The not as bad as feared numbers gave a boost to the shares of Alphabet (GOOG) and Microsoft (MSFT) after the release of their latest quarterly results. However, the companies that have either missed lowered expectations and/or reduced their outlooks have seen their stocks punished by Wall Street, which was the case for Walmart (WMT) earlier this week and Meta Platforms (META) after yesterday’s closing bell. Walmart is due to release July-quarter results on August 16th.
The latest batch of earnings, which includes results from the aforementioned Meta Platforms (META) and Qualcomm (QCOM), is making for a mixed reading this morning. The latter company beat on both the top and bottom lines, but the semiconductor’s fourth-quarter guidance was weaker than expected and the stock is down modestly in pre-market action. Meantime, it was a doubled-edged sword for Meta, as misses in both revenues and earnings, along with reduced guidance, continued the year-to-date pain for those who hold stakes in the social media company; META shares are looking at a lower start today. Conversely, the shares of both industrial giant Honeywell (HON) and automaker Ford (F) are pointing to higher openings after both companies reported better-than-expected quarterly results.
Turning back to the Federal Reserve, the market focused on few points Chairman Powell made during his press conference and that was when the big upward moves in the major averages occurred. Specifically, Mr. Powell said that the federal funds rate was at a level that could be considered neutral and that the size of future interest-rate hikes will depend on the forthcoming economic and, in particular, inflation data. The Fed also left the target 2022 federal funds rate range unchanged, which would suggest getting to that point by year’s end may be accomplished by a more-modest series of rate hikes than the three-quarter point percentage increases we saw at both the June and July Federal Open Market Committee meeting.
Before we get to the September meeting, the Fed will have about eight weeks of new economic data at its disposal, including two readings on both consumer and producer prices. There is a sense among market pundits that with Mr. Powell saying that demand is starting to slow, the inflation data may show enough of a retreat that the Federal Reserve would consider reducing the size of the rate increases, perhaps as early as its next scheduled Federal Open Market Committee (FOMC) meeting in September. This gave a big boost to equities, especially the higher-growth technology stocks.
The Federal Reserve Chairman also said the central bank is seeing signs that demand is starting to slow, citing a pullback in both consumer spending and business investment. However, Mr. Powell also shot down the notion that the economy is in a recession, highlighting the continued strength of the labor market. The chairman also believes that there is wiggle room for labor conditions to slow some, without pushing the overall economy into a sharp downturn. That said, the drop in bond yields after the GDP figure further implies that the recession is forthcoming, if we are not already in one right now.
Overall, the market showed some confidence in what Chairman Powell said and ran with it yesterday afternoon. That said, we continue to recommend that investors maintain a well-diversified portfolio of equities, bonds, and cash, as the risks, including the possibility of a recession or at the very least stagflation, remain in play for the market. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
