U.S. Market Averages Dropped 1% After Fed's Future Rate Outlook Signaled Hawkish Stance

Barry Adams
20 Sep, 2023
New York City

Market indexes closed down after the Federal Reserve held interest rate target range as expected but policymakers left the door open for one more rate hike before the end of the year. 

The S&P 500 and the Nasdaq Composite indexes fell after the release of interest rate decisions and economic projections. 

But averages rebounded after thirty minutes of trading, only to drift lower and accelerate decline in the final hour of trading. 

Investors worried that rates are likely to stay higher for longer, despite the Fed's projection that the economy is not likely to go into a recession either in 2023 or 2024. 

The Federal Reserve said it will hold the fed funds target range at 22-year high between 5.25% and 5.50% but also held out for another rate hike later in the year, after the conclusion of two-day meeting. 

Policymakers appeared divided after mixed economic signals, but committee members prefer more restrictive interest rate policy in future. 

The Fed's projection released showed that policymakers are likely to increase rates higher one more time at the next meeting in November, but are also estimating fewer rate cuts in 2024. 

Policymakers now estimate the fed funds rate at 5.6% by the year's end, the same as in the June forecast, while rates are expected to be higher at 5.1% in 2024, compared to 4.6% estimated at the end of June meeting.

Committee members sharply revised higher economic growth outlook to 2.1% from the previous estimate of 1.0% released in June, and 2024 GDP rate of 1.5% compared to 1.1%. 

The economic growth forecast suggested that members are not looking for a recession this year or next. 

The committee members also revised slightly higher inflation outlook, as measured by the Price Consumption Expenditure Index, to 3.3% from 3.2% but the was unrevised at 2.4% in 2024. 

The core PCE rate in 2023 was revised slightly lower to 3.7% from 3.9% but the alternative measure of inflation was left unchanged for 2024 at 2.6%. 

The unemployment rate forecast was revised lower to 3.8% from 4.1% in 2023 and to 4.1% from 4.5% in 2024.

Despite multiple rate hikes by the Federal Reserve over the last seventeen months, inflation has stayed above the Fed's target rate because inflation pressures have broadened from commodities and manufactured goods to services and wages. 

The policymakers have little influence over the direction of the commodities prices, like metals and energy, but hold a larger sway on the direction of mortgage rates and borrowing rates for corporations and consumers. 

 

U.S. Indexes & Yields 

The S&P 500 index declined 1.% to 4,402.20 and the Nasdaq Composite decreased 1.5% to 13,469.13. 

The yield on 2-year Treasury notes hovered near 5.05%, 10-year Treasury notes inched lower to 4.32% and 30-year Treasury bonds edged up to 4.40%. 

Crude oil decreased $1.09 to $89.38 a barrel and natural gas prices declined 10 cents to $2.73 a thermal unit. 

The dollar index edged slightly lower to 104.78, the level last seen in March but higher than the low of 99.85 on July 13. 

 

U.S. Stock Movers 

Instacart declined 10.3% to $30.01 on the second day of trading after the grocery delivery company priced its initial public offering at $30 a share and struggled to hold its early gains on the first day. 

The company sold 30 million shares in the public offering but all shares changed hands on the first day of trading, suggesting that stock may face more headwinds in the next few weeks. 

Pinterest Inc rose 4.3% to $27.34 after the company forecasted annual revenue growth to accelerate following the slowdown in 2022 and 2023.

The company laid out its future plans in its first investor day On Tuesday. 

Coty Inc increased 5.7% to $12.12 after the cosmetic company lifted its full-year 2024 outlook and said comparable sales to grow in the range between 8% and 10% from its previous estimate between 6% and 8%. 

 

European Markets Rebounded After Inflation Eased in Germany and UK 

European markets rebounded after investors reacted positively to inflation reports from Germany and the U.K.

Positive market sentiment was in check ahead of the U.S. Federal Reserve's rate decision later today and the Bank of England's rate announcement Thursday. 

Despite the improvement in inflation in the last seven months, the rebound in crude oil and natural gas prices in the last five weeks stoked fears of another bout of inflation. 

Crude oil prices are hovering at one-year highs and natural gas prices have rebounded from the lows in June. 

Additionally, investors reacted positively after passenger car registration in August was in double digits, despite the decline in registration rate from a year ago. 

 

Record Decline In German PPI

German producer price index declined at a record pace in August since data collection began in August, the Federal Statistical Office or DeStatis reported Wednesday. 

The producer price index dropped 12.6% from a year ago, largely because of a base effect reflecting higher prices last year, and the decline accelerated for the second month in a row after falling 6.0% in the previous month. 

Energy prices dropped 31.9% and electricity prices fell 43.2%. 

However, the core rate of producer price index, which excludes energy prices, rose 1.2%. 

On a monthly basis producer prices rose 0.3% in August, the first rise in four months.  

 

UK Inflation Rate Drops to 18-month Low

Consumer price inflation in the U.K. slowed to 6.7% in August from 6.8% in the previous month, the Office for National Statistics reported Wednesday. 

The inflation rate fell to the slowest pace since February 2022 after food prices rose at a slower pace and housing cost declined.  

Core rate of inflation, which excludes volatile food and energy prices, eased to 6.2% from 6.9% in the previous, the lowest level since March. 

On a monthly basis, consumer price inflation rose 0.3%. 

 

Passenger Vehicle Registration Expanded In August 

Passenger car registrations in the European Union rose 21% from a year ago to 787,600 units in August, the European Automobile Manufacturers Association or ACEA reported Wednesday. 

Sales in August are generally slower, but a double-digit increase in registration suggested that pandemic-era component shortages are finally easing and automakers are able to meet higher demand. 

Vehicle registration rose for the thirteenth month in a row in August and market share of battery-electric cars rose above 20% for the first time and surpassed diesel cars for the second time this year. 

Passenger vehicle registration increased in double-digits in most markets, including in the three largest markets in the region, with registration rising in Germany by 37.3%, in France by 24.3%, and in Italy by 11.9%. 

Battery electric car registrations in the European Union soared 118.1% to 165,200 vehicles in August, about 21% of the market. 

For the first eight months of the year, EU passenger car registrations rose 17.9% from the same period a year ago to 7.1 million units. 

Despite the improvement in sales this year, sales are still lower than the pre-pandemic level of 9.0 million units sold in 2019.  

 

Europe Indexes & Yields

The DAX index increased 0.8% to 15,781.59, the CAC-40 index advanced 0.7% to 7,330.79 and the FTSE 100 index inched up 0.9% to 7,731.65. 

The yield on 10-year German bonds increased to 2.71%, French bonds traded higher to 3.26%, the UK gilts edged down to 4.26% and Italian bonds rose to 4.49%.

The euro edged lower to a three-month low to $1.069, the British pound to $1.237 and the U.S. dollar fetched 89.74 Swiss cents.

Brent crude decreased $0.83 to $93.49 a barrel and the Dutch TTF natural gas increased €0.13 to €36.65 per MWh.

 

Japan Trade Swings to Deficit In August, China Holds Rates 

Popular indexes in Asia dropped ahead of rate decisions from several central banks this week. 

Global market sentiment was weak ahead of interest rate decisions from the U.S. Federal Reserve, the Bank of England and the Bank of Japan. 

Sweden, Norway and Switzerland are also set to announce their rate decisions this week. 

The Bank of Japan is expected to leave its  ultra-loose monetary policy intact but some investors are hoping that policymakers will provide better insights on future rate patch and inflation pressures in the economy. 

Market sentiment was weak on the worries of a rebound in inflation and uncertainty about interest rates in the U.S. and Europe and looming global slowdown. 

Higher oil prices weighed on the market sentiment after Brent crude oil price jumped above $95 a barrel after Saudi Arabia and Russia extended voluntary production cuts to the end of 2023. 

 

China Holds Rates 

The People's Bank of China also announced its monthly rate decisions as the overall outlook for the economy remains uncertain. 

China's one-year loan prime rate, used for consumer and corporate lending, was held at 3.45% and 5-year loan prime rate, reference rate for mortgage lending, was left unchanged at 4.2%.  

 

Japan's International Trade Shrank In August 

Japan's imports declined for the fifth month in a row and fell at the fastest pace after energy cost declined. 

Japan's imports declined 17.8% from a year ago to ¥8,924.82 billion in August following a 13.6% decline in July, data from Finance Ministry showed today. 

Imports from China declined by 12.1%, the U.S. by 9.5%, Hong Kong by 20.8%, South Korea by 10.8%, Malaysia by  30.0%, India by 9.4%, Australia by 41.6%, and Russia by 62.5%, but increased from Germany by 7.9%. 

Japan's exports decreased for the second month in a row in August, largely because of weak demand from China. 

Exports decreased 0.8% from a year ago to ¥7,994.35 billion. 

Exports declined to China by 11.0%, Taiwan by 14.3%, South Korea by 10.8%, Singapore by 24.6%, Australia by 10.6%, and Russia by 57.6% but increased to the U.S. by 5.1%, India by 16.2%, and the EU by 12.7%. 

Japan reported trade deficit of ¥930.48 billion in August, second monthly deficit in a row, and the shortfall jumped from ¥66.3 billion in July, despite rising automobile exports to the U.S. 

Japan has recorded monthly trade deficit for two years in a row barring June 2023. 

The latest decline in exports was driven by a decline in food exports after its largest trading partner China impose ban on Japanese seafood in late August.   

Japan's trade surplus with the U.S. surged 38.2% to ¥650.60 billion. 

Exports increased 5.1% to record August-high of ¥1.62 trillion but imports decreased 9.5% to ¥967.39 billion.

 

Asia Market Indexes 

In Wednesday's trading, the Nikkei index decreased 0.7% to 33,023.78 and tech stock weakness extended to the third day in a row. 

Market indexes in Hong Kong declined to a 4-week low as investors await the Fed's rate decision and economic projections later today. 

Two new stocks started trading on the Shanghai Stock Exchange on Wednesday after completing their initial public offerings. 

Jilin Joinature Polymer jumped 11% to 32.79 yuan and Hunan Sund Technological advanced 26% to 83.86 yuan. 

In China trading, the Shanghai SSE Composite index inched down 0.5% to 3,108.57 and the Hang Seng index decreased 0.5% to 17,908.48 and the KOSPI index increased 0.02% to 2,559.74.

China's yuan has been trading near a 16-year low after about $68 billion of capital outflow between July and August. 

Stocks in Mumbai fell sharply on the worries of resurgent inflation after crude oil prices jumped to a one-year high. 

The Sensex index decreased 561.19 points to 67,043.80 and the Nifty index declined 165.40 points to 19,968.30. 

On the Bombay Stock Exchange, 226 stocks traded at their 52-week highs and 138 traded at their 52-week lows. 

In August, the Nikkei index fell 0.6%, the SSE Composite index declined 5.2%, the Hang Seng index fell 8.2% and the KOSPI index decreased 4.2%.