Stocks fall, dollar gains after Fed hike signals

A number of officials said that an “insufficiently restrictive” policy stance could stall recent progress on moderating inflation pressures, according to minutes of their latest policy gathering, suggesting they are prepared to move rates up further than their December forecast of 5.1%. The statement also said “almost all” officials agreed it was appropriate to raise interest rates by 25 basis points at the meeting, while “a few” favored or could have supported a bigger 50 basis-point hike.

Ben Jeffery at BMO Capital Markets:

“There wasn’t a great deal of new information. The most notable takeaway was that a few participants saw a case for a 50 bp hike in February, although the support for the 25 bp move that ultimately transpired was unanimous.”

Matthew Weller at Forex.com and City Index:

“Moving forward, there is nothing in these FOMC minutes that should keep the central bank from raising interest rates ‘higher for longer’ if US economic data continues to come in stronger than expected.”

Quincy Krosby at LPL Financial:

“Overall, the minutes suggest a ‘wait-and-see approach’ as they remain data dependent. Should inflation continue to climb, based on the minutes, there could be enough voting members to push for a 50 basis-point move.”

Mike Loewengart at Morgan Stanley Global Investment Office:

“Bottom line is that many market headwinds aren’t going away and investors should expect volatility to stay as they parse over the impact rates being higher for longer will have.”

Chris Zaccarelli at Independent Advisor Alliance:

“There is something for everyone in the Fed minutes, with bulls able to point to mostly dovish language and concerns about financial stability and the upcoming debt limit fight (e.g. arguing for easier policy), while the bears can point to the continued focus on inflation and no mentions of the word “disinflation” (i.e. inflation coming down), so clearly the Fed believes the risks are to the upside on inflation and they may not be in any hurry to cut rates.”

David Russell at TradeStation:

“No news is good news from the Fed. Hearing that almost all the policymakers supported 25 basis points confirms that the Fed has shifted into a slower gear in its rate hikes. Their willingness to remain open and assess the data shows less of a firm commitment to extreme hawkishness. These minutes from the Fed keep investors in wait-and-see mode.”

In the run-up to the Fed’s minutes, a Bloomberg survey of economists showed that inflation that’s proving increasingly stubborn will prompt the central bank to raise rates to an even higher peak level and hold them there through the year. Forecasters boosted their projections for the Fed’s preferred inflation gauge for every quarter through the first half of next year.

Aside from the Fed, traders kept an eye on some corporate highlights.

Apple Inc. has a moonshot-style project underway that dates back to the Steve Jobs era: noninvasive and continuous blood glucose monitoring, according to people familiar with the effort. Intel Corp. slashed its dividend payment to the lowest level in 16 years. Investors will also be interested in hearing from one of this year’s top performers in the S&P 500: Nvidia Corp., which is due to report results after the close.

Traders pinned hopes on the earnings season to push the S&P 500 somewhere out of a trading range it’s been stuck in for months. Between JPMorgan Chase & Co.’s results that kicked off the announcement season and Walmart Inc.’s report Tuesday, the S&P 500 added 0.4%. This ties for the smallest earnings-season reaction in either direction since 2018, data compiled by Bloomberg show.

Skepticism

“After a strong start to the year driven by absolute and relative short covering by institutional investors, skepticism over the sustainability of the rally remains elevated, and bears are beginning to wrestle control from the bulls,” said Mark Hackett, chief of investment research at Nationwide. “While institutional investors have been net buyers this year, they remain conservatively positioned and quick to sell, while retail investors continue to aggressively buy equities.”

“This is a similar trend to what we saw through the second half of 2022,” he added.

Another thing traders are taking note is the recent flare-up in equity volatility. And the reason is that after a lengthy subdued period, that may put the S&P 500’s rally to the test. The so-called VIX held near its highest level since mid-December.

“There was some huge upside call buying activity on the VIX in February as traders turned bearish on the resilience of the equity market,” said Aurel’s Gurmit Kapoor.

That’s a stark contrast to data at the end of last month that showed very few were betting against the rally. Shares out on loan, an indication of short-selling interest, stood just below 1% of the S&P 500’s median free float as of Jan. 31, according to figures compiled by S&P Global Market Intelligence.

As the Fed’s most-ambitious policy tightening in decades tests investors’ resolve toward equities, US companies are increasingly relying on buybacks to boost their market valuation.

Companies in the S&P 500 bought back at least $936 billion of shares in 2022, compared with the $565 billion they paid out as dividends, according to estimates by Howard Silverblatt at S&P Dow Jones Indices. That’s the highest amount of buybacks since the turn of the millennium.

Geopolitical tensions also simmered on the background.

US President Joe Biden said Russian President Vladimir Putin made a “big mistake” in suspending participation in the New START nuclear treaty, his first direct response to the announcement. Biden made the brief remark Wednesday in Warsaw, ahead of a meeting with a group of eastern-flank NATO allies known as the Bucharest Nine.

Meantime, Putin said he’s waiting for his Chinese counterpart Xi Jinping to visit Russia as he hailed deepening ties with Beijing at talks with China’s top diplomat.

Elsewhere, US natural gas futures have fallen to levels not seen since pandemic-era lockdowns more than two years ago that strangled the economic activity underpinning energy demand.