Cooler but Elevated Inflation Worries Fed, More Rate Hikes After Today's Pause

Barry Adams
14 Jun, 2023
New York City

Stocks and Treasury yields turned volatile after the Federal Reserve paused its monetary tightening cycle but forecasted more hikes in the year. 

As widely expected on Wall Street, the Federal Reserve decided to hold rates but continue to sell its holding of government debt. 

Despite ten multiple rate hikes in a row over the last fifteen months, the economy has been resilient, labor market conditions are still tight and inflation is significantly above the Fed's target rate of 2%. 

Fed Chairman Jerome Powell said in a speech after the rate decision that the full impact of cumulative rate hikes are still not  fully felt by the economy. 

“We have been seeing the effects of our policy tightening and demand in the most interest rate sensitive sectors of the economy, especially housing and investment," Powell commented in a presentation after the rate decision. 

“It will take time however, for the full effects of monetary restraint to be realized, especially on inflation,” highlighting lagged effects of the rate decisions over the last one year. 

The Federal Reserve 2023 GDP growth rate was revised higher to 1.1% from the previous estimate of 0.4% in March and the unemployment rate estimate was revised lower to 4.1% from 4.5%. 

The PCE inflation was revised to 3.2% from 3.3% in March but core PCE was revised higher to 3.9% from 3.6%. 

The federal funds rate at the end of 2023 was revised higher to 5.6% from 5.1%, suggesting as many as two likely rate hikes in the second half of the year.  

 

Fed Holds Rates for Now, More Hikes to Follow 

The Federal Reserve in an unanimous decision agreed to leave the target range for the federal funds unchanged at 5% to 5.25%. 

The Federal Open Market Committee paused rates for the first time after lifting rates for ten times in a row since March 2022, when rates were revised higher by 500 basis points over the last fifteen months. 

The Fed left the door open for future rate hikes and added that the central bank will continue to reduce its holding of Treasury securities and agency debt and agency mortgage-backed securities.  

The Federal Reserve is hoping that multiple rate hikes since March 15 will impact broader economic activities and slowdown inflation forces to the Fed's target rate of 2%. 

"The Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the accompanying statement noted. 

 

Wholesale Inflation Declined In May 

Producer prices for final demand declined 0.3% in May from the previous month, following a 0.2% rise in April, the U.S. Bureau of Labor Statistics reported Wednesday. 

Goods prices declined 1.6%, the largest decline since July 2022 and services prices increased 0.2%. 

Most of the May decline is attributable to the index  for final demand energy, which dropped 6.8%. Sixty percent of the May decline in the index for final demand goods can be traced to a 13.8% drop in prices for gasoline.

Prices for final demand foods moved down 1.3%. 

In contrast, the index for final demand goods less foods and energy increased 0.1%.

Service inflation increased 0.2% in May and over 40 percent of the increase in prices can be attributed to margins for automobiles and automobile parts retailing, which rose 4.2%.

On an annual basis, core inflation, which excludes food, energy and trade, eased to 2.8% in May from 3.3% in April and 6.8% a year ago. 

 

U.S. Indexes & Yields 

The S&P 500 index was unchanged at 4,370.65 and the Nasdaq Composite increased 0.2% to 13,594.84. 

The yield on 2-year Treasury notes decreased to 4.69%, 10-year Treasury notes edged down to 3.79% and 30-year Treasury bonds eased 3.88%. 

Crude oil increased $0.71 to $70.03 a barrel and natural gas prices increased 3 cents to $2.37 a thermal unit. 

 

U.S. Stock Movers

Advanced Micro Devices, Inc jumped 2.2% to $127.09 and the company said on Tuesday it is ready to ship its latest chip for artificial intelligence. 

Vodafone Group Plc increased 1.9% to $9.32 after the company and CK Hutchison owned Three UK agreed to merge their UK businesses. 

After the merger, the UK will have only three mobile network operators - BT, Virgin Media O2 and Vodafone-Three UK. 

Alphabet Inc Class A declined 0.9% to $122.78 after the European Union charged Google's parent for violating antitrust rules in adtech business. 

UnitedHealth Group Inc dropped 7.2% to $455.97 after the company's chief financial officer John Rex said at a conference that non-emergency surgeries rates this quarter are running above the average level. 

On the back of the news, Cigna declined 5.3% to $257.82 and Humana Inc dropped 13.5% to $443.0.  

Toyota Motor Corp jumped 4.5% to $165.41 after chairman Akio Toyoda was reelected by shareholders, endorsing a new electric vehicle strategy. 

Toyota traded at about a 9-month high in New York and closed at 16-month high  ¥2,310.0 in Tokyo. 

 

European Markets Closed Higher Ahead of Rate Decisions

Stocks advanced in the eurozone but gains were muted ahead of decisions. 

Benchmark indexes edged higher in London after crude oil and commodities prices rebounded and luxury stocks led gainers in Paris.  

Eurozone industrial production reversed previous month's decline in April after capital goods orders rebounded. 

British GDP expanded 0.2% from the previous month in April, the Office for National Statistics reported Wednesday. 

The retail and wholesale trade lifted service sector activities by 0.3% in April after falling 0.5% in March. 

On the other hand, production output declined 0.3% after expanding 0.7% in March and construction output  declined 0.6% after advancing 0.2%. 

Investors are awaiting rate decision from the Federal Reserve at 2:00 p.m. ET and from the European Central Bank Thursday. 

 

Euro Area Industrial Production Rebounded In April  

Eurozone industrial production increased 1.0% in April, reversing 3.8% decline in March, the Eurostat reported Wednesday. 

On an annual basis, industrial production increased 0.2%. 

On a monthly basis in April production of capital goods advanced 14.7% and energy 1.0%, while production of intermediate goods fell 1.0%, durable consumer goods 2.6% and non-durable consumer goods 3.0%

On an annual basis in April, production of capital goods rose 8.3% and nondurable consumer goods 0.6%, while production of durable consumer goods fell 4.6%, intermediate goods 6.2% and energy 7.4%.

Among member states, industrial production soared 21.5% in Ireland, rose 0.8% in France and flat in Germany while declined 1.8% in Spain and fell 1.9% in Italy. 

 

Europe Indexes & Yields 

The DAX index increased 0.6% to 16,319.97,  the CAC-40 index increased 0.9% to 7,355.93 and the FTSE 100 index increased 0.6% to 7,637.82. 

The yield on 10-year German Bunds inched higher to 2.45%, French bonds traded higher to 2.98%, the UK gilts edged up to 4.43% and Italian bonds increased to 4.08%.

The euro edged higher to $1.08, the British pound edged up to $1.26 and the Swiss franc traded at 90.26 cents.

Brent crude increased $1.19 to $73.12 a barrel and the Dutch TTF natural gas increased €2.26 to €38.36 per MWh.

 

Europe Stock Movers

Shell PLC increased 1.7% to 2,336.50 pence after the company said it plans to increase dividend and accelerate stock buybacks. 

Puma SE increased 0.6% to €51.60 after the German footwear company announced a corporate reorganization. 

Wacker Neuson SE soared 6% to €21.85 after the Germany-based construction equipment company set a target to increase its sales by 78% in 2030. 

Entain Plc declined 8% to 1,212.0 pence after the company agreed to acquire Poland-based STS Holdings for £750 million. 

Heidelberger Druckmaschinen AG declined 6.5% to €1.59 after the company forecasted cautious outlook for the current fiscal year. 

Safestore Holdings plc decreased 1.5% to 917.0 pence after the company said its pre-tax profit in the first-half declined 64%. 

Grifols SA Class A soared 8.3% to €11.99 after the Spanish pharmaceutical company announced its plan to sell its stake in Shanghai RAAS for $1.5 billion. 

Logitech International SA plunged 10% to CHF 51.68 after the company said its chief executive officer Bracken Darrell plans to leave the company.