Major Averages Stable After Fed Hikes Rates to 22-year High

Barry Adams
26 Jul, 2023
New York City

Market averages traded slightly lower after the Fed raised rates to the highest level in 22 years. 

The Federal Reserve lifted its fed funds rate range by 25 basis points to between 5.25% and 5.50%, taking the rates to the highest level since January 2001. 

The Fed's move was widely anticipated and rates rose for the eleventh time since March 2022. 

Fed funds rates are interest rates for transactions between banks but higher rates filter down to other rates charged by banks to consumers and businesses. 

Often higher rates are immediately increased for borrowers but banks are slow in paying higher deposit rates. 

Fed's credibility is on line because despite the sharp decline in overall inflation to near 5% from as high as 9%, core inflation has stayed near 5% rate after ten rate hikes over the last sixteen months. 

The Fed has repeatedly reiterated that the central bank is committed to lowering inflation to 2% but has failed to specify by when. 

Moreover, how will households and businesses cope with housing prices that are at least 100% higher and most services costs at least 50% more over the last three years. 

Goods inflation has spread deeper into the economy and service inflation stayed stubbornly high and the Fed is not likely to erase price gains of the last three years by increasing rates in increments of 25 basis points. 

Stocks were under pressure as investors digested a fresh batch of earnings and all eyes were on the Fed. 

Investors reacted to Big Tech earnings and Microsoft and Google parent Alphabet reported rising revenues and earnings in its cloud segments. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 0.2% to 4,568.26 and the Nasdaq Composite fell 0.1% to 14,101.27. 

The yield on 2-year Treasury notes decreased to 4.86%, 10-year Treasury notes inched lower to 3.86% and 30-year Treasury bonds edged down to 3.91%. 

Crude oil decreased $0.79 to $78.80 a barrel and natural gas prices decreased 8 cents to $2.64 a thermal unit. 

 

U.S. Stock Movers 

Microsoft Corp declined 3.3% to $339.58 after the company said revenue in the fiscal fourth quarter ending in June increased 8% to $56 b.2illion and net income soared to $20.08 billion from $16.74 billion a year ago. 

Microsoft stock declined after Azure revenue growth slowed to 26% from 27% in the previous quarter and 40% from a year ago. 

Cloud segment revenue increased 15% to $23.99 billion. 

Alphabet Inc soared 6.2% to $130.73 after the company reported better-than-expected earnings and revenue. 

Second quarter revenue increased 7% to $74.6 billion and ad revenue rose 3.3% to $58.1 billion and net income rose to $18.37 billion from $16 billion and diluted earnings per share increased to $1.44 from $1.21 a year ago. 

Revenue from the cloud segment which includes its Workspace segment jumped 26%.

 

Euro Area Lending Growth Slowed to 7-year Low, European Markets Down

European market indexes traded down in cautious trading as investors digested a mixed batch of earnings and awaited rate decisions. 

The Federal Reserve is set to lift its interest rates by 25 basis points later today and the European Central Bank is expected to follow a similar rate hike on Thursday. 

Investors welcomed China's decision to provide more support to moribund property sector, but measures are likely to fall short in reviving demand and ease financial pressure on home developers. 

Closer to home, bank lending to households in the Euro Area continued to decline to the slowest pace in seven years after demand for credit fell on rising interest rates. 

Bank lending to households in the Euro Area rose 1.7% from a year ago to €6.87 trillion in June 2023, the lowest growth rate since May 2016.  

On the other hand, lending to companies increased 3%, the slowest rate of growth since November 2021. 

The overall private sector credit growth, including households and non-financial corporations, decelerated to 2% in June, the slowest pace since August 2016.

 

Europe Indexes & Yields

The DAX index decreased 0.5% to 16,131.46, the CAC-40 index fell 1.4% to 7,315.07 and the FTSE 100 index fell 0.2% to 7,676.89.  

The yield on 10-year German bonds decreased higher to 2.43%, French bonds traded lower to 2.99%, the UK gilts edged down to 4.28% and Italian bonds increased to 4.08%.

The euro edged higher to $1.10, the British pound to $1.28 and the U.S. dollar fetched 86.99 Swiss cents

Brent crude increased $0.70 to $82.94 a barrel and the Dutch TTF natural gas increased €3.34 to €29.28 per MWh.

 

Europe Stock Movers

Deutsche Bank AG increased 1.3% to €10.54 after the largest German bank reported a fall in second quarter earnings. 

RWE AG rallied 1.8% to €40.67 after the German utility company raised its full-year earnings outlook. 

MTU Aero Engines AG dropped 2.8% to €207.0 after the company warned that the Geared Turbofan inspection program will negatively impact its free cash flow.  

Puma SE advanced 3.6% to €57.90 after the German footwear company reported a 11% jump in sales in the second quarter.  

LVMH declined 4.5% to €815.20 after the luxury goods maker reported a surprise fall in sales in the U.S. amid economic uncertainties. 

Danone SA declined 2.7% to €55.21 after the French dairy products maker said it will separate its Russia operation in July and take a one-time charge of €700 million. 

Renault SA declined 1.5% to €38.94 and the French automaker finalized its restructured alliance with Nissan. 

Orange SA dropped 2.6% to €10.45 after the French telecom network operator said consolidated net income in the first-half declined by €378 million to €1.09 billion. 

Rolls-Royce Holdings Plc soared 20.3% to 183.56 pence after the aircraft engine maker raised its full-year operating profit estimate by about 45%. 

Natwest Group Plc declined 3.5% to 242.50 pence and chief executive officer Alison Rose resigned and said he made "a serious error of judgement" in talking to a reporter about finances of UK politician Nigel Farage. 

Llyods Banking Group Plc fell 3.2% to 44.64 pence after the UK-banking group reported first-half earnings below market expectations.