Stocks Closed Lower Ahead of Rate Hike
2:53 pm Tuesday, June 14th, 2022
Stocks and bonds gyrated in choppy trade on Tuesday after the prior day’s market rout, while investors braced for a U.S. interest rate rise this week that could be the largest in 28 years.
There was some burgeoning hope in the futures market this morning that the stock market would forge a rebound effort today. It was easy to understand why.
Entering today, the S&P 500 and Nasdaq Composite were down 10.0% and 11.7%, respectively, from their intraday highs last Monday. The expectation was that the market would rebound from a short-term oversold condition.
The rub today is that the market is having to adjust to rapidly shifting rate-hike expectations. According to the CME’s FedWatch Tool, there is a 91.8% probability of a 75-basis point rate hike on Wednesday (versus 3.9% a week ago), an 85.7% probability of another 75-basis point rate hike at the July FOMC meeting (versus a 0.4% probability a week ago), and a 91.8% probability of a 50-basis point rate hike at the September FOMC meeting.
If these rate-hike expectations come to fruition, the target range for the fed funds rate will be 2.75-3.00% after the September meeting. A week ago, the fed funds futures market assigned only a 0.2% probability to the target range being 2.75-3.00% after the September meeting.
The potential upside is that a more aggressive approach from the Fed will help slay inflation and inflation expectations. The presumed downside is that a more aggressive approach from the Fed will ultimately lead to slower economic growth and possibly a recession that is bad for earnings prospects. Accordingly, the uncertainty over what represents “fair value” in the stock market at this juncture has detracted from investor conviction because there isn’t any faith in current aggregate earnings estimates being met.
Oracle (ORCL) for its part bucked that prevailing notion with a better-than-expected fiscal Q4 earnings report and outlook. It has provided some influential support for the information technology sector (+0.4%) and the Nasdaq 100, but it hasn’t been enough to alter sentiment for the broader market.
The jump in yields also follows a Producer Price Index report for May that was not any worse than expected, but still didn’t show any real reprieve from inflation pressures.
In other developments, FedEx (FDX) has made a strong move that is contributing to the relative strength of the Dow Jones Transportation Average. The jump in FDX follows the news that the company added three, new independent directors and raised its quarterly dividend by 53% to $1.15 per common share.
Today’s worst-performing sectors are the utilities (-3.3%), consumer staples, and health care (-1.2%) sectors, which are presumably getting pinched by Treasury yields rising and providing some competitive interest for income-oriented investors.
