U.S. equities surged on Wednesday while shorter-dated Treasury yields fell after the Federal Reserve hiked interest rates by +0.50% as widely expected, while Jerome Powell poured cold water on the idea of +0.75% rate increase.
The S&P500 posted its best day since May 2020 after Jerome Powell eased concern the central bank will embark on a more aggressive pace of tightening despite delivering the steepest rate increase in two decades. The Federal Open Market Committee voted unanimously to increase rates by +0.5% and will begin allowing Treasury and mortgage-backed securities to run off its balance sheet in June, initially at US$47.5 billion per month increasing to US$95 billion over three months. On the idea of a +0.75% rate increase, Powell noted it is “not something the committee is actively considering” while noting “additional +0.5% increases should be on the table for the next couple of meetings”.
Powell said that even with the most aggressive policy in years there was a good chance of a soft landing for the economy which remained “strong and well-positioned to handle tighter monetary policy” and “I think we have a good chance to restore price stability without a recession”. Another takeaway was that the committee remains optimistic that inflation will flatten out over the coming months.
The S&P500 climbed +2.99% in broad-based buying with 95% of stocks higher and all sectors positive led by energy +4.15%, communications +3.68%, and technology +3.51%. The Dow Jones also gained +2.81%, as did the Nasdaq Composite +3.19% and Russell 2000 +2.69% while the VIX slumped -13.09% to 25.42. The yield curve steepened with shorter-dated yields falling while longer-dated yields rose with the 2-year rate down -12.6 basis points, the 10-year weakened by -2.9 basis points while the 30-year rose +2.8 basis points. The U.S. dollar index weakened -by 0.94%, falling the most in two months to 102.49 while breakeven inflation rates rose with the 5 and 10-year rates up +4.3 and +5.1 basis points respectively, pushing real yields lower across the board.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open higher this morning with ASX200 futures up +41 points or +0.56% to 7,313. The index finished -0.16% lower on Wednesday with an -0.89% decline in materials offsetting a +0.65% rise for financials and other sectors were mixed. Flight Centre was a notable underperformer falling -by 6.7% after presenting a recent performance at a conference warning of a loss of as much as $225 million in EBITDA for the year to 30th June although said it expects further strength in the coming months. The Australian dollar climbed +2.31% overnight to 0.7260 while the 10-year government bond yield extended gains, rising +14.5 basis points to 3.541%.
In commodities, oil prices jumped with both WTI and Brent crude up +5.04% and +4.83% respectively to US$107.57 and US$110.04 a barrel. The gains follow a weaker USD and less hawkish Fed despite crude inventories for the week to April 29th building by +1.303 million barrels against expectations for a -600k barrel decline in part offset by a bigger draw in gasoline of -2.223 million barrels compared to -800k forecast. Iron ore futures in Singapore declined -0.57% on Wednesday and are down a further -0.85% this morning at US$141.65. Gold rose +0.70% to US$1,881.22, as did silver +1.81% to US$22.98 and Bitcoin climbed +5.33% to US$39,800.
Economic data:
- Bank of England Rate Decision 21:00
- U.S. Initial Jobless Claims (Apr 30th) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
