Market Rally Paused After Central Bankers Supported Additional Rate Hikes

Barry Adams
28 Jun, 2023
New York City

Market indexes traded near flatline after central bankers discussed monetary policies and future rate path and investors reviewed holdings ahead of the end of the second quarter. 

Market gains were capped after Federal Reserve Chairman Jerome Powell forcefully suggested more "restrictive" rates are on the way. 

Powell and central bank heads of UK, Japan and Europe at a forum in Portugal reiterated their commitment in bringing down inflation to 2%. 

Despite multiple rate hikes in the U.S., Europe and European Union, rates are still lagging inflation and not restrictive enough. 

But policymakers have argued that rates have a lagging effect on the economy and the full impact of rate hikes have not been felt yet. 

Policymakers are still not sure whether additional rate hikes are needed because rate hikes take time to work through the economy and additional hikes may push the U.S. economy into a recession. 

Powell's tough talk on inflation got attention of traders and investors but investors are growing increasingly skeptical of the Fed's ability to bring down inflation. 

Overall inflation has declined but that is driven by a sharp fall in energy prices and core inflation has remained stubbornly high because of tight labor market conditions and service sector inflation. 

Fed Chairman Powell commented at today's forum that rates are likely to rise again this year, echoing comments at the time of rate decision June 14. 

Powell showed urgency to lift rates and said rates are likely to go higher at next policy meetings in July and September because of "a very strong labor market" and cautioned "it's certainly possible" that the U.S. economy may see "a significant downturn."

The S&P 500 index and the Nasdaq Composite index are set to close higher in the first-half following a rally in mega-cap tech stocks riding on a wave of optimism around artificial intelligence.  

The Nasdaq index is up 29% in the year so far, its best first-half performance in four decades and the S&P 500 index is up 14%. 

The Nasdaq Composite index traded around flatline and jumped as much as 0.7% in early trading before beginning its descent. 

Earlier in trading, the S&P 500 index advanced on the back of strength in the housing market but dipped into negative territory after Comments from Fed Chairman Powell. 

Yesterday, the U.S. Census Bureau reported new home sales jumped in May and today Mortgage Bankers Association said mortgage application volume rebounded despite higher rates and elevated home prices. 

 

Mortgage Applications Edged Higher 

Mortgage loan application volume increased 3% on an adjusted basis from the previous in the week ending June 23.  On an unadjusted basis, application volume declined 8%. 

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $726,200 or less increased to 6.75%, an increase of 2 basis points from the previous week. 

Despite the recent rebound, mortgage application for a new home declined 21% and refinance dropped 32% from a year ago. 

 

U.S. International Goods Deficit Shrank

U.S. international goods trade deficit declined 6.1% to $91.1 billion from $97.1 billion, the U.S. Census Bureau reported Tuesday. 

Exports in May declined 0.6%, reflecting 14.2% decline in food, feed and beverage exports and 3.0% fall in industrial supplies. 

Imports dropped 2.7%, reflecting a decline in purchase of consumer goods by 7.3% and 5.9% fall in industrial supplies. 

 

U.S. Indexes & Yields 

The S&P 500 index decreased 0.1% to 4,373.44 and the Nasdaq Composite fell 0.2% to 13,579.28.  

The yield on 2-year Treasury notes increased to 4.75%, 10-year Treasury notes inched lower to 3.75% and 30-year Treasury bonds edged down to 3.83%. 

Crude oil increased $2.04 to $69.75 a barrel and natural gas prices decreased 11 cents to $2.67 a thermal unit. 

 

U.S. Stock Movers

Chip stocks were in focus on the worries that the U.S. may impose more exports restrictions to China including a ban on sale of AI chips. 

Nvidia Corp declined 2.2% to $409.98, AMD dropped 1.6% to $108.57 and Intel Corporation fell 2.5% to $33.23. 

General Mills Inc declined 4.4% to $77.16 after the food company reported weaker than expected quarterly results. 

AeroVironment, Inc jumped 5.4% to $95.20 after the military drone maker reported better-than-expected quarterly results and forecasted higher-than-expected full-year revenue. 

 

European Markets Extended 2-day Gains, Central Bankers Talk Tough 

Stocks surged in Europe and investors digested inflation and consumer confidence data in the region. 

Market indexes reversed the previous week's weakness despite mixed economic data in the euro zone but reacted positively to the U.S. data. 

Investors also overlooked the slowest annual growth in bank lending to households in the eurozone to 2.1% to 6.87 trillion in May, the lowest growth rate since May 2016, the European Central Bank said Tuesday.   

U.S. new home sales jumped in May despite elevated home prices and rising interest rates and durable goods orders accelerated to 1.7% in the month indicating a resilient economy. 

Investors are looking ahead to comments from a group of central bankers later today at a forum in Sintra, Portugal and gain a broader overview of global economic developments trends. 

European Central Bank President Christine Lagarde, Federal Reserve Chair Jerome Powell, Bank of Japan Governor Kazuo Ueda and Bank of England's Andrew Bailey are scheduled to participate in the forum.  

 

German and French Confidence Indexes Diverge 

Consumer confidence index declined to minus 25.4 points in July from 24.4 points in June, GfK Group reported Tuesday. 

The consumer climate index declined for the first time in nine months, reflecting weakening economic and income expectations. 

However, consumer confidence in France increased in June to 85 from 83 in May, the statistical agency INSEE reported Tuesday. 

The confidence index improved because more people expressed optimism about improving living standards, saving expectations and personal financial situation. 

 

Italy's Inflation Slowed In June 

Italy's annual inflation rate slowed to 6.4% in June, falling sharply from 7.6% in May, the statistical office ISTAT said Tuesday. 

The inflation rate declined to a 14-month low and dropped for a sixth month in a row barring a rise in April. 

The persistent and large decline in energy prices contributed the decline in inflation. 

Non-regulated energy inflation slowed to 8.4% from 20.3%, processed food inflation decreased to 11.9% from 13.2% but unprocessed food increased to 9.6% from 8.8% a year ago. 

 

Spain's Retail Sales Surged In May 

Spain's retail sales in May surged 6% from a year ago, the National Statistical Institute reported Tuesday. 

Retail sales data in April was revise =d higher to 5.7% and sales in May increased for the sixth month in a row. 

On a monthly basis, retail sales increased at a modest pace of 0.3% following a 0.9% rise in April.   

Sales of non-food products increased 12.8%, and in large chain stores rose 12.2%, driven by personal equipment sales increase of 10.9% and other goods sales rise of 12.3%.

 

Europe Indexes & Yields 

The DAX index increased 0.6% to 15,949.0, the CAC-40 index jumped 1.0% to 7,286.32 and the FTSE 100 index advanced 0.5% to 7,500.49.

The yield on 10-year German Bunds inched higher to 2.31%, French bonds traded lower to 2.84%, the UK gilts edged up to 4.32% and Italian bonds decreased to 3.96%.

The euro edged higher to $1.09, the British pound to $1.268 and the U.S. dollar fetched 89.63 Swiss cents.

Brent crude increased $1.77 to $74.02 a barrel and the Dutch TTF natural gas decreased €0.38 to €34.13 per MWh.

 

Europe Stock Movers

Equinor ASA increased 0.3% to €26.23 after Norwegian regulators approved the energy company's plan to develop subsea fields, Irpa and Verdande, and the production well Andvare.

UBS Group advanced 0.8% to CHF 17.70 after the company said it plans to cut more than half of Credit Suisse's staff and unveiled its plan to integrate the recently acquired bank. 

Swiss Life Holding AG decreased 2.5% to CHF 521.40 after the insurance company said it is on track to achieve its financial goals in 2024. 

Mulberry Group jumped 1.9% to 256.70 pence after the company reiterated its full-year outlook. 

Airline stocks advanced following the strong U.S. economic data on the hopes of higher demand for air travel. 

Lufthansa, EasyJet, Ryan Air, Wizz Air and Air France KLM advanced between 0.5% and 2%.