Fed Funds Rate Hike Failed to Settle Rate Path Debate, Stocks Turned Lower In Choppy Trading

Barry Adams
03 May, 2023
New York City

Stocks opened higher and stayed in the plus territory despite volatile trading after the Federal Reserve hiked its key lending rate range.  

As widely anticipated, the Federal Reserve lifted the fed funds target range by 25 basis points to between 5.0% and 5.25% and increased the borrowing cost to the highest since September 2007. 

The 10th rate increase was widely expected and in a unanimous decision the rate setting committee agreed to revise rates higher but also left the door open to pause future rate hikes. 

Investors looking for the Fed to pause after the todays' rate hike got a stronger reassurance after the post-meeting statement removed a statement that supported the need for additional rate increases.  

In the FOMC statement released after the meeting the Federal Reserve reiterated its commitment to lower inflation to 2% but showed flexibility to increase rates, if the economic and inflation data suggested the need for it. 

The Fed's statement excluded the previously included sentence "some additional policy firming may be appropriate,” which was interpreted by some investors that the central bank is open to the possibility of rate hike pause. 

The intense rate pause-or-hike debate has rattled the stock and bond market for weeks with no clear direction for the rate path going forward, but showed no sign of easing either after the rate decision. 

Short term U.S. Treasury yields stayed above 5% and the yields on bonds maturing between 2 and 30 years drifted slightly lower, confirming that investors are still not sure which way rates are heading. 

Moreover, investors are becoming more concerned about the lack of progress in lifting the federal government debt ceiling with the government expected to run out of money as early as early June. 

With both political parties showing no urgency to settle their difference, the federal government may be heading for closure as early as in five week.  

Regional banking crisis has gripped much of the market sentiment for the last month and regional banks declined in today's trading on the worries that higher rates will only deepen the crisis and may spread to commercial real estate. 

 

Private Sector Job Gains Accelerated In April 

Private sector hiring accelerated in April, contrary to the expectations of a cooler job market, payroll processing firm ADP reported Wednesday. 

Payrolls expanded 296,000 in April from the downwardly revised 142,000 in March, reflecting the strongest monthly gain since July 2022. 

Annual pay increase slowed to 6.7% from a year ago, slower than the increase above 7% for months. 

"Employers are hiring aggressively while holding pay gains in check as workers come off the sidelines", said Nela Richardson, chief economist, ADP.

Job gains were evenly distributed among employers of all sizes and a total of 243,000 were added by businesses employing less than 500. 

The services sector added 229,000 jobs led by an increase in leisure and hospitality industries by 154,000, education and health services by 69,000, trade, transportation and utilities by 32,000, and information industry by 2,000. 

On the other hand the goods-producing industry added 67,000 jobs driven by gains in the construction industry of 53,000 and mining industry of 52,000 but the manufacturing industry trimmed 38,000 jobs.

 

U.S. Indexes & Yields 

The S&P 500 index rose  0.1% to 4,126.16 and the Nasdaq Composite increased 0.1% to 12,102.25. 

The yield on 2-year Treasury notes declined to 3.97%, 10-year Treasury notes edged down to 3.40% and 30-year Treasury bonds held at 3.69%. 

Crude oil fell $2.0 to $69.77 a barrel and natural gas prices fell2 cents to $2.18 a thermal unit. 

 

U.S. Stock Movers 

Advanced Micro Devices Inc fell 7.2% to $83.50 and the semiconductor company forecasted demand weakness to persist in the second quarter. 

Revenue in the first quarter declined 9% to $5.4 billion from $5.9 billion and gross margin fell to 44% from 48% a year ago. 

The company swung to a net loss of $139 million from $786 million and diluted earnings per share fell to ($0.09) from 56 cents a year ago. 

For the second quarter of 2023, AMD expects revenue to be approximately $5.3 billion, plus or minus  $300 million and non-GAAP gross margin to be approximately 50%.  

Client group, which includes PC makers, sales plunged 65% to $739 million from $2.1 billion. Data center sales inched slightly higher to $1.295 billion from $1.293 and the company hinted for higher sales in the second half. 

Gaming segment sales, which includes sales to console makers and graphics chips, edged lower to $1.8 billion from $1.9 billion and embedded segment, which includes networking chips, sales jumped to $1.5 billion from $595 million a year ago.  

Starbucks Corp declined 4.2% $109.66 after the coffee chain operator reiterated its annual earnings outlook and comparable store sales in China rebounded following the ending of zero-Covid policy. 

Revenue in the first quarter rose 14% to $8.7 billion from $7.6 billion after sales picked up in China following the end of zero-Covid policy. 

Net earnings attributable to shareholders increased to $908.3 million from $674.5 million and diluted earnings per share to 79 cents from 58 cents a year ago. 

Expeditors International of Washington Inc was nearly unchanged at $113.24 after the company estimated weak demand conditions for ocean and air cargo freights to persist in the current quarter.  

Revenue in the first quarter plunged 44% to $2.6 billion following the steep drop in rates and volumes. 

Net income dropped 35% to $226.01 million from $346.1 million and diluted earnings per share fell to $1.45 from $2.05 a year ago. 

In the quarter, the company repurchased 2.0 million shares at an average price of $108.98 a share.  

 

European Markets Rebounded

European markets reversed 1% decline in the previous session after traders returned to increase positions in industrial and financial companies. 

The European Central Bank is also expected to increase its key lending rate by at least 25 basis points at the conclusion of its policy meeting on Thursday. 

Investors reacted to corporate news and Lufthansa reported a surge in revenue on the rebound in travel demand. Porsche reported higher sales driven by an increase in vehicle deliveries and BNP Paribas reported higher-than-expected first quarter total revenue. 

 

Euro Area Jobless Rate Drops to New Low 

The jobless rate in the Euro Area declined to 6.5% in March, the lowest rate on record, Eurostat reported Wednesday. 

The rate declined from 6.6% in February and fell from 6.8% in March 2022. 

The statistical agency estimated that 12.960 million in the EU, including 11.010 million in the euro area, were unemployed in March.

From the previous month, unemployment decreased by 155,000 in the EU  and by 121,000 in the euro area and from a year ago unemployment decreased 353,000 in  the EU and 365,000 in the euro area.

In March, the youth unemployment rate eased to 14.3% both in the EU and in the euro area, down from 14.5% and 14.4% respectively in the previous month.

Spain led the jobless rate in the currency union with 12.8%, followed by 10.9% in Greece, 7.8% in Italy and 7.3% in Sweden. Germany recorded an unemployment rate of 2.8% and the Netherlands 3.5% and France 6.9%. 

 

Europe Indexes & Yields 

The DAX index increased 0.6% to 15,815.06, the CAC-40 index advanced 0.3% to 7,403.83 and the FTSE 100 index added 0.2% to 7,788.37. 

The yield on 10-year German Bunds eased to 2.23%, French bonds to 2.83%, the UK gilts to 3.65% and Italian bonds to 4.12%.

The euro hovered near a one-year high against the dollar as the U.S. economy faced banking turmoil. 

The euro edged higher to $1.103, the British pound to $1.256 and the Swiss franc to 88.86 cents.

Brent crude fell $2.78 to $72.56 a barrel and the Dutch TTF natural gas decreased €0.75 to €36.79 per MWh.

 

Europe Stock Movers 

Deutsche Lufthansa AG declined 1.7% to €9.47 after the German airline reported a surge in revenue in the first quarter. 

Revenue in the first quarter soared 40% to €7.0 billion from €5.0 billion a year ago. 

Net profit shrank 20% to €467 million from €520 million and diluted earnings per share fell to 39 cents from 49 cents a year ago.  

The passenger count increased 64% to 21.6 million and passenger load factor jumped 14.3 percentage points to 79.7% from 65.4% but cargo load factor declined to 58.7% from 68.1% a year ago. 

BNP Paribas SA increased a fraction to €57.0 after the French bank reported higher-than-expected revenue. 

Revenue in the first quarter increased 1.4% to €12.03 billion from €11.87 billion a year ago. 

Pre-tax net income from continuing operations in the quarter declined 9.4% to €2.37 billion from €2.62 billion a year ago.  

Porsche Automobil Holding SE increased 0.3% to €49.76 after the company reported higher deliveries in the first quarter. 

First quarter revenue rose 25.5% to €10.10 billion from €8.04 billion a year ago and operating profit rose 25.4% from €1.47 billion to €1.84 billion.

Vehicle deliveries in the quarter increased 18% to 80,767 from 68,426 a year ago.