U.S. Stocks Rally After Rate Hike On Soft Landing Hopes

Barry Adams
01 Feb, 2023
New York City

Stocks reversed morning losses and soared in the afternoon trading after the Federal Reserve slowed rate hike but signaled more increases to follow. 

The Federal Reserve increased its key lending rate at a slower pace but held out for more hikes to combat elevated inflation. 

In an unanimous decision, the Federal Open Market Committee raised federal funds target rate range by 25 basis points to 4.50% to 4.75%. the statement from the Federal Reserve showed. 

Policymakers have been struggling in deciding  the future rate path as the economy cools but labor market conditions remain tight and higher rates have a lagging effect on the economy. 

With inflation falling but far from the Fed's desired level and the economy still growing, indicating that the rates are still not restrictive enough to bring down the inflation, making the Fed's balancing act between inflation and employment levels challenging. 

Chairman Powell in a press conference after the rate decision stressed that the Federal Reserve is closely watching labor markets data. 

With today's rate hike the Federal Reserve has raised rates eight times in the last ten months but inflation has stayed well above the Fed's target rate of 2%. 

Some investors have been hoping for the Federal Reserve to pause on the hopes of cooling inflation. 

“Given our outlook, I don’t see us cutting rates this year, if our outlook comes true, in a press conference after the decision, Chairman Jerome Powell clarified. 

Across the Atlantic, the European Central Bank and the Bank of England are also scheduled to release rate decisions on Thursday. 

 

U.S. Private Sector Job Growth Slowed In January

Private sector job growth slowed more than expected in January, according to a monthly report released by the payment processor ADP Wednesday.  

Private sector net job additions declined to 106,000 in January from the upwardly revised 253,000 in December. 

The employment in the service sector rose 109,000 after employment in leisure and hospitality expanded.  

"In January, we saw the impact of weather-related disruptions on employment during our reference week. Hiring was stronger during other weeks of the month, in line with the strength we saw late last year," said ADP chief economist Nela Richardson. 

Jobs in large businesses increased 128,000 and employment at mid sized businesses advanced 64,000 jobs, while employment at small businesses declined 75,000, the ADP report showed. 

The U.S. Labor Department is scheduled to release its monthly non-farm payroll report on Friday and economists are anticipating job growth to slow to 175,000 from 223,000 in December.  

Jobless rate in January is expected to advance to 3.6% from 2.5%. 

 

U.S. Indexes Surge After Rate Decision  

Benchmark indexes soared after the Federal Reserve raised rates as expected and signaled more rate hikes to follow at next meetings. 

The S&P 500 index closed higher 1.2% to 4,119.21 and the Nasdaq Composite index advanced 2.0% to 11,816.32

Crude oil decreased $2.04 to $76.83 a barrel and natural gas futures fell 19 cents to $2.48 a thermal unit. 

The yield on 2-year Treasury notes declined to 4.10%, 10-year Treasury notes inched lower to 3.41% and 30-year Treasury notes decreased to 3.57%. 

 

European Markets Anticipate Aggressive Rates Hikes

European markets struggled to advance ahead of crucial rate decisions and investors reacted to local corporate earnings reports in cautious trading. 

 

Euro Area Inflation Eased In January 

The Euro Area inflation in January declined to an eight-month low to 8.5% from 9.2% in December.  

Core inflation remained stable at 5.2%, Eurostat said in a preliminary statement on Wednesday.

Looking at the inflation components, inflation slowed across all factors but remained elevated. 

Annual inflation rate for energy declined to 17.2% from 25.5% in December, followed by food, alcohol & tobacco  eased to 14.1% from  13.8%, non-energy industrial goods to 6.9% from 6.4% and services  to 4.2% from 4.4%. 

The preliminary report used the estimate for the  German inflation data after the Federal Statistics Office faced technical glitches and could not deliver the information before the release of this report. 

 

European Indexes Trade In Tight Range 

The DAX index increased 0.5% to 15,195.85, the CAC-40 index gained 0.2% to 15,195.85 and the FTSE 100 index edged up 0.01% to 7,772.77. 

 

Euro Advanced ahead of Expected ECB Rate Hike 

The euro inched higher to $1.089, the British pound advanced to $1.232 and the Swiss franc traded up to 91.68 U.S. cents. 

 

Crude Oil Held Steady 

Brent crude oil price decreased to 74 cents to $84.67 a barrel and the Dutch TTF natural gas futures rose 3.4% to €59.31 per MWh. 

 

Europe Movers 

Novartis AG declined 2.6% to 80.83 Swiss franc after the Swiss pharmaceutical company reported a sharp decline in fourth quarter profit. 

Net sales in the December quarter fell 4% to $12.7 billion from $13.2 billion and net income plunged 91% to $1.5 billion from $16.3 billion a year ago. 

Excluding the impact of Roche income, net income rose 2% and earnings per share rose 7% in constant currencies. 

Novartis agreed to sell 53.3 million (approximately 33%) Roche bearer shares in a bilateral transaction to Roche for a total consideration of $20.7 billion in November 2021. 

Vodafone Group fell 2.1% to 91.18 pence after the British telecom said growth slowed in its latest quarter. 

Revenue in the fiscal third quarter ending in December declined 04% to €11.63 billion from €11.68 billion largely on the account of weakness in its German business. 

The telecom operator reiterated its fiscal year 2023 guidance for adjusted EBITDA and leased assets between €15.0 and 15.2 billion and adjusted free cash flow of €5.1  billion. 

Hannover Re decreased 5% to €176.85 after the German reinsurance company said it has increased its 2023 major net loss to €1.725 billion to account for higher net loss expectations from natural disasters.  

Halma Plc increased 1.4% to 2,178.64 pence after the fire detection safety company agreed to acquire Bradford, UK based Thermocable (Flexible Elements) Ltd for £22 million.

Thermocable in the year ending in March 2022 generated sales of £6 million with return on sales above the "Halma's target range of 18% to 22%." 

 

Asian Markets 

Asian markets paused ahead of rate decisions in the U.S. and Europe and a private survey showed manufacturing in China shrank at a slower pace in January but stayed strong in India. 

The Nikkei 225 index increased 0.07% to 27,346.88 and the yen edged lower to 129.57 against the U.S. dollar. 

The Shanghai Composite Index increased 0.9% to 3,284.92 and the Hang Seng index advanced 1.1% to 22,072.18. 

 

India's Budget to Expand Rail and Highway Networks  

Stocks in Mumbai traded mixed after the central government released the Union Budget with a focus on improving transportation investment and accelerating manufacturing industry growth. 

Central government estimated spending in fiscal year 2024 ending in March to increase 7.5% to ₹45 lakh crore, including ₹5.94 lakh crore for defense and increase railways spending by 48% to ₹2.4 lakh crore.

The Finance Ministry is expecting the fiscal year 2024 nominal growth to slow down to 11% from the estimated 15.4% in the fiscal year 2023.

The Sensex in Mumbai traded higher 0.3% or 158.18 points to 59,708.08 but the Nifty index declined 0.3% or 45.85 points to 17,616.30. 

The Indian rupee edged slightly lower to 81.74 against the U.S. dollar. 

After the market closed, Adani Enterprises announced its plan to cancel its $2.5 billion stock offering in a filing with the stock exchange. 

In a stunning setback, billionaire Gautam Adani decided to pull the plug after the stock resumed its decline for the second day following the critical report from Hindenburg Research.  

"However, today the market has been unprecedented, and our stock price has fluctuated over the course of the day. Given these extraordinary circumstances, the Company’s board felt that going ahead with the issue will not be morally correct. 

The interest of the investors is paramount and hence to insulate them from any potential financial losses, the Board has decided not to go ahead with the FPO," the company said in a filing with the Bombay Stock Exchange. 

The offering cancellation is not expected to have any material near-term impact on the company's operations but the rise of the company in recent years was seen by many as the emergence of India's economy on the global stage. 

"Our balance sheet is very healthy with strong cash flows and secure assets, and we have an impeccable track record of servicing our debt. This decision will not have any impact on our existing operations and future plans," Chairman Gautam Adani added in the statement.