Stocks slipped today as Wall Street mulled over Big Tech earnings and prepared for the Fed’s impending rate hike. The Nasdaq Composite underperformed, declining by 0.4%, while the Dow remained mostly unchanged through noon. The S&P fell by just 0.2%.
The Dow remains on the brink of a record, as a positive close this afternoon would culminate the best winning streak for the index since January 1987 – a 13-day consecutive rise. The longest-ever streak of daily gains for the Dow occurred in June 1897 when the index experienced a 14-day run. This was roughly a year after the inception of the Dow in May 1896.
Google’s parent company, Alphabet, saw a rise of more than 6%, driven by better-than-anticipated quarterly results, buoyed by a surge in cloud revenue. On the flip side, Microsoft’s stock fell over 3% following a report of slower cloud revenue growth.
Social media app Snap saw its shares plummet by 19% due to its weaker-than-expected guidance for the current quarter’s performance. The stock’s shares are now down roughly 88% from their all-time high, set back in 2021. By contrast, Dow member Boeing saw a jump of more than 5% following a better-than-expected Q2 report, propelled by increased commercial aircraft deliveries. Market participants are also waiting for earnings reports from Meta, Chipotle, and Mattel, set to be released after the closing bell this afternoon.
Investors are riding a wave of optimism following a slew of recent data indicating softer inflation, fuelling the hope that the Federal Reserve will conclude its rate-hike streak post-July meeting. According to the CME Group’s FedWatch Tool, there’s a 98% chance that the Federal Reserve will hike rates by 25 basis points after its meeting today. But some market players urge caution, warning against the notion that the Fed is done with its tightening measures.
“Market participants should be cautious of becoming overly hopeful that today’s session will mark the end of the rate-hiking cycle,” UBS’ Solita Marcelli commented in a morning note.
For the past year and a half, market watchers have anxiously anticipated each Federal Reserve announcement. Questions surrounding the size of the rate hike, the tone of Chairman Jerome Powell’s comments, and potential future actions have been a constant source of intrigue. Most analysts believe this is the last hike of the cycle. Some even expect the tightening to trigger a contraction in the economy, eventually leading inflation back to the Fed’s 2% target and heralding an easing cycle in 2024.
According to Cullen Morgan of Goldman Sachs, the options market anticipates a minimal 75 basis point move ahead of the Fed’s decision. This is the lowest Federal Open Market Committee straddle since the Fed’s rate-hiking cycle began, despite the increased event premium from Microsoft and Alphabet. But, Goldman’s trading desk noticed clients purchasing short-dated downside in the S&P 500 SPDRs ETF, or SPY, to leverage the low volatility, indicating potential downside movement.
Powell is likely to emphasize a data-driven approach in his press conference (what else is new), making no firm commitments to future decisions. Fed officials have reiterated two more hikes this year as reasonable, but a cooling inflation trend and resilience in the economy has led many to believe that July could be the last hike.
Despite cool inflation data, the Fed’s guidance still points to two more rate hikes. Yet the market doesn’t believe that Powell will actually raise rates again this year. Stocks have continued to rise and yields are down in recent weeks. Instead, investors are asking:
When is the Fed going to start cutting rates again?
Goldman Sachs anticipates the first rate cut to happen in Q2 2024, once core PCE inflation falls below 3% YoY and below 2.5% on a monthly annualized basis. On the terminal or equilibrium rate, Goldman forecasts the funds rate to stabilize at 3-3.25%, above the FOMC’s 2.5% median longer-run dot.
JPMorgan’s market intel desk gives a 65% probability of a “Hike & Pause” scenario, meaning a rate hike in July with future decisions being data-dependent. The bank’s chief economist, Michael Feroli, expects the phrase “the extent of additional policy firming that may be appropriate” to remain in the policy statement and Powell to reiterate June’s dot plot forecast in his press conference. However, how Powell assesses the current disinflation progress will likely dictate the market’s direction in August, a month in which there is no FOMC meeting.
We’ll find out what Powel has to say soon enough. Until then, expect stocks to remain coiled, ready to make wild, volatile moves during the entirety of Powell’s post-hike speech.
