Crude Oil Plunged 4% but Stocks Look Beyond Hawkish Comments from Powell

Barry Adams
22 Jun, 2023
New York City

Stocks turned around from the morning losses and tech stocks led the gainers after falling for four days in a row. 

Market averages traded in a tight range and investors remained divided about the future rate path. 

Major averages turned lower in the morning a day after Federal Reserve Chairman Powell stressed the need to continue the central bank's monetary tightening after last week's rate pause. 

Chairman Powell reiterated his views on the economy and said fighting inflation is a long battle and rates have to be raised to cool inflation to 2% target rate.  

The central bank's chief highlighted stubborn inflation for the second day in his Semiannual Monetary Policy Report to the U.S. Senate Banking Committee on Thursday. 

Crude oil plunged 4% and dropped to a new 18-month after Powell's hawkish comments raised the prospects of higher rates for longer, adding more pressures on demand weakness. 

Tech stocks rebounded in the afternoon after investors snapped up stocks that suffered losses last week. 

Tesla Inc, Microsoft Corp and Alphabet Inc jumped more than 1% and Amazon.com, Inc jumped 3%.   

In other economic news, initial claims of jobless benefits for the week ending on June 17 were unchanged at 264,000 and continuing claims declined to 1.759 million from 1.772 at the end of the previous week. 

Existing home sales in the U.S. increased 2.3% from the previous month to 4.3 million annual rate in May, the National Association of Realtors reported Thursday. 

Higher mortgage rated and elevated home prices have kept demand weak and fewer homes for sales also negatively impacted overall sales volume. 

The median existing home price for all home types declined 3.1% from a year ago to $396,100.  

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.3% to 4,375.82 and the Nasdaq Composite advanced 0.6% to 13,583.55.

The yield on 2-year Treasury notes increased to 4.73%, 10-year Treasury notes inched lower to 3.71% and 30-year Treasury bonds edged down to 3.83%. 

Crude oil decreased $3.36 to $69.17 a barrel and natural gas prices increased 1 cent to $2.60 a thermal unit. 

 

U.S. Stock Movers

Darden Restaurants, Inc declined 2.7% to $161.80 after the parent of Olive Garden and Longhorn Steakhouse reported better-than-expected quarterly results but forecasted mixed annual outlook. 

Overstock.com Inc increased 7% to $22.66 after the company acquired digital assets and intellectual property of Bed Bath & Beyond at the floor price of $21.5 million in an auction. 

Spirit AeroSystems Holdings Inc dropped 9.2% to $26.95 after the company stopped production at its Kansas plant following workers voting to strike from Saturday. 

Spirit is one of the key parts suppliers to aviation company Boeing. 

Boeing Co declined 2.7% to $206.25 following the strike news Spirit AeroSystems.  

 

Rate Hikes In Europe Put Investors On Alert 

European markets remained under pressure on rate path and economic slowdown worries.  

Major averages in Frankfurt, Paris and London traded down for the fourth day in a row this week. 

Market sentiment soured after the Federal Reserve Bank Chairman Jerome Powell hinted more rate hikes ahead to cool inflation down to 2% in his presentation to the U.S. lawmakers. 

Powell's comments brought back the rate hike worries to the center after last week's rate pause suggested to some investors that the central bank is nearing its rate tightening cycle. 

In addition, the central banks in the UK, Norway and Switzerland hiked rates. 

The Swiss National Bank held out for more rate hikes in the year and the Norges Bank also hikes its estimate of peak rates citing stubborn inflation. 

 

Bank of England Hikes Rates Again 

The Bank of England lifted its key rate by 50 basis points to tackle inflation that is hovering near 9%. 

After the thirteenth rate hike, the Bank of England's key lending rate was revised higher to 5.0% following the consumer price inflation held at 8.7% in May and core inflation accelerated to 7.1%. 

The Monetary Policy Committee in a 7-2 vote decided to revise the rate higher by a larger-than-expected amount as the central bank struggled to bring down sky high inflation rate to 2%. 

The policy rates are now at their highest levels since the 2008 financial crisis and financial markets are now forecasting rates to rise to 6.0% by the year's end. 

Higher interest rates spell difficult times ahead for millions of mortgage borrowers. 

About 2 million homeowners are likely to face sharply higher monthly payments upon refinancing in the next two years, as most mortgages in the UK are variable length less than five years. 

 

Switzerland Slowed Rate Hike

The Swiss National Bank lifted its rate but at a slower pace and held out for more rate hikes in future. 

The Swiss central bank lifted its policy rate by 25 basis points to 1.75% effective June 23. 

The SNB lifted its rate for the fifth time in a row after hiking the rate by 50 basis points in March and December 2022, and by 75 basis points in September 2022.  

The central bank also lowered its inflation estimate to 2.2% from the previous estimate of 2.6% but lifted the estimate for the next year to 2.2% from the earlier forecast of 2.0%. 

 

Norway Accelerated Rate Increase

The Norges Bank lifted its deposit rate by 50 basis points to 3.75% and forecasted more than hikes may be necessary in the remainder of the year. 

The policy rate is now at a 15-year high and the central bank is set to increase its rate again in August. 

The central bank also revised higher its peak rate forecast to 4.25%, significantly higher than the previous estimate of 3.5% in March. 

The Norwegian crown jumped to 11.55 from 11.687 against the euro and 10.52 from 10.67 against the U.S. dollar before the announcement respectively.  

“If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched. It may then become more costly to bring inflation down again”, Governor Ida Wolden Bache said in a statement released by the central bank.

 

Turkey Monetary Policy U-turn 

Turkey in a surprise monetary policy U-turn decided to lift rates by a whopping 650 basis points. 

Turkey's central bank lifted its policy rate to 15% from 8.5% as the new administration of the re-elected prime minister Recep Tayyip  Erdogan tackled 40% inflation in May.  

The Turkish lira fell 2.5% to 24.11 against the U.S. dollar and dropped to a new low because investors feared that the interest rate hike did not go far enough . 

Many investors were hoping for rates to rise to as much as 21%.  

“The Committee decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior," the newly appointed Governor Hafize Gaye Erkan said in a statement.  

Erdogan appointed Mehmet Simsek as the new Treasury and Finance Minister to arrest surging inflation and cost of living crisis after the Turkish lira lost 80% of its value in the last five years. 

 

Europe Indexes & Yields 

The DAX index decreased 0.2% to 15,988.16,  the CAC-40 index declined 0.8% to 7,203.28 and the FTSE 100 index dropped 0.8% to 7,502.03.

The yield on 10-year German Bunds inched higher to 2.41%, French bonds traded higher to 2.99%, the UK gilts edged down to 4.41% and Italian bonds decreased to 4.09%.

The euro edged lower to $1.10, the British pound to $1.278 and the U.S. dollar fetched 89.27 Swiss cents.

Brent crude decreased $3.05 to $74.08 a barrel and the Dutch TTF natural gas declined €2.65 to €34.10 per MWh.

 

Europe Stock Movers

Ocado Group jumped 28.7% to 553.80 pence and surged as much as 42% on a speculation that the company may be an acquisition target according to a report in the newspaper the Times. 

Whitbread declined 1% to 3,362.0 pence after the owner of Premier inn reported its trading update. 

Novo Nordisk AS dropped 1.9% to DKK 1,072.60 after the Danish drug company said the European Union's drug regulator had last month raised thyroid cancer safety alert for several of its drugs. 

SES SA increased 4.9% to €5.09 in Paris trading after the Luxembourg-based company confirmed it has terminated its merger talks with Intelsat.