U.S. equities rallied while the yield curve flattened after the Federal Reserve raised interest rates by 0.25% and updated their “dot plot” projections in line with market expectations.
Policymakers voted in favour of 8 to 1 to raise rates by 0.25% for the first time since 2018, the one dissenting vote with St. Louis President James Bullard who was in favour of a 0.50% rate increase. This decision was widely expected, and the focus was on the release of the “dot plot” and economic projections which saw officials’ median rate projection for 2022 at 1.9% in line with traders’ expectations and higher than previously forecast by the Fed. Rates are then expected to rise to 2.8% in 2023 and remain at 2.8% in 2024. Equities briefly pared their gains before rallying again as Fed Chair Jerome Powell spoke at the post-meeting press conference where he played down the risk of a recession and suggested the economy is strong enough to withstand tighter policy while pledging to be “nimble” in reaction to incoming data. The Fed Will also begin to allow its $8.9 trillion balance sheet to shrink at “a coming meeting” without elaborating further.
Economic growth for 2022 was revised lower to 2.8% from 4.0% previously, while the median estimates for 2023 and 2024 remained unchanged at 2.2% and 2.0% respectively. Core PCE inflation forecasts for 2022 were revised higher to 4.3% from 2.6% previously, as was the 2023 estimate to 2.6% from 2.3% and 2024 to 2.3% from 2.1% previously. In other economic data, retail sales for February were slightly lower than forecast for the month at +0.3% versus +0.4% forecast while the prior reading was revised higher to +4.9%. A core measure that excludes autos and gas declined -0.4% from a revised higher +5.2% previously.
The S&P500 rose +2.24% boosted by gains in technology +3.32%, consumer discretionary +3.35% and financials +2.86% while energy lagged -0.43%. The Dow Jones also rose +1.55%, as did the Nasdaq Composite +3.77% and Russell 2000 +2.74% with the VIX declining -10.93% to 26.57. The yield curve flattened with the spread between the 2 and 10-year yields declining -3.8 basis points to 0.26%, a sign the market remains worried about the outlook for growth. Inflation breakevens declined highlighting confidence by the market that the Fed’s actions will bring inflation under control with the 1-year rate down -20.1 basis points to 5.599% and both the 5 and 10-year rates declined -10.5 and -6.3 basis points respectively.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a decisively stronger open this morning with ASX200 futures up +111 points or +1.55% to 7,259. The index gained +1.10% on Wednesday with all sectors positive paced by technology +3.29% and consumer discretionary +1.99% with 76% of stocks trading higher. Life 360 climbed +7.4% along with Block +7%, APX +4.8%, WTC +4.7% and XRO +4.1%. Major miners were mixed despite a rise in iron ore prices with FMG +1.5% higher, RIO up +0.1% while BHP slipped -0.4%. Major banks were higher following recent gains in yields with CBA up +0.94%, as was ANZ +1.80%, WBC +0.85% and NAB +0.36%. The Australian dollar rose +1.28% overnight to 0.7288 while the yield on 10-year government bonds edged -2.3 basis points lower to +2.497% ahead of unemployment data this morning. Estimates are for +37k jobs to have been added for the month of February with the unemployment rate edging lower to +4.1% from +4.2% previously.
Oil prices weakened further overnight with both WTI and Brent crude -1.45% and -2.07% lower at US$95.04 and US$97.84 with data showing crude oil stockpiles for the week ending 11th March unexpectedly rose +4.345m barrels against estimates for a -1.375m barrel decline. Iron ore futures in Singapore climbed +8.41% on Wednesday and are a further +1.15% higher at US$150.95 this morning. Gold rose +0.40% to US$1,925 an oz despite a rise in real yields, following heavy selling the prior two sessions. Silver also rose +0.80% to US$25.09 and Bitcoin gained +4.49% to US$41,213.
Economic data:
- New Zealand GDP (YoY Q4) 08:45
- Australian Unemployment (MoM Feb) 11:30
- Eurozone Inflation (YoY Feb) 21:00
- BOE Rate Decision 23:00
- U.S. Industrial Production (MoM Feb) 00:15
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.
