Will the Fed Abandon the 2% Target Rate?

Alexander Garcia
01 May, 2024
Miami

Benchmark indexes on Wall Street retained a downward bias as investors await the Fed's rate decision. 

The S&P 500 index and the Nasdaq Composite declined 0.2% ahead of the Federal Reserve's rate decisions and comments on the appropriate level of interest rates. 

At the start of the year, the Fed had raised expectations of as many as four rate cuts in the year and suggested that while the economy is strong, there has been considerable progress in curbing inflationary pressures. 

However, as the year progressed, those expectations of rate cuts were dashed after inflation stalled near 3%, primarily because of the elevated inflation in the service sector. 

The Federal Reserve has raised interest rates eleven times between March 2022 and July 2023, lifting rates from zero to 5.5%. 

But as inflation began to ease from the 40-year high peak of 9.1% in June 2022 and hovered above 3% in the second half of 2023 and first quarter of 2024, investors expectations rose that the Fed may have flexibility in decreasing rates as early as June. 

However, progress in bringing down inflation to a 2% annual rate has stalled in the last six months, amid a resilient economy and moderating but tight labor market conditions. 

The Fed's own projection on inflation at the beginning of the year also stoked speculation that policymakers are laying the groundwork for rate cuts in the second half. 

The latest updates on inflation indicators, nonfarm payrolls, GDP growth, retail sales, and durable goods orders suggested that rates are not restrictive enough and wages are rising at rates not commensurate with the Fed's inflation target rate of 2%. 

 

Job Openings Dropped to a 3-year Low 

Job openings in March declined by 325,000 and dropped to the lowest level since February 2021, signaling moderating labor market conditions. 

Job postings fell 0.2 percentage points to 5.1% of all workers, according to the Job Openings and Labor Turnover Survey released Wednesday. 

Openings declined by 1.1 million from a year ago, as openings in construction fell by 182,000, declined in finance and insurance by 158,000, but increased in state and local government education by 68,000. 

Over the month, both hiring and separations changed little, indicating labor market conditions are still tight but moderating. 

In March, hirings declined by 455,000 to 5.5 million, while the total number of separations decreased by 339,000 to 5.2 million. 

Taking into account the regional distribution, job openings in the West fell by 194,000, in the Midwest by 112,000, in the South by 41,000, but rose in the Northeast by 22,000. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.2% to 5,022.73, and the Nasdaq Composite fell 0.3% to 15,610,50. 

The yield on 2-year Treasury notes edged higher to 5.04%, 10-year Treasury notes inched higher to 4.68%, and 30-year Treasury bonds edged lower to 4.78%.

WTI crude oil decreased $2.10 to $79.57 a barrel, and natural gas prices decreased 6 cents to $1.92 a thermal unit.

Gold increased by $16.52 to $2,307.93 an ounce, and silver rose 18 cents to $26.53. 

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 106.17.

 

U.S. Stock Movers

Starbucks Corp. dropped 13% to $77.0 after the coffee chain operator reported weaker-than-expected revenue and earnings in the first quarter. 

Pinterest soared 16.6% to $39.03 after the social media company reported better-than-expected revenue and earnings in the first quarter. 

Super Micro Computer dropped 14% to $738.50 after the company announced lower-than-expected third-quarter revenue of $3.85 billion and higher-than-expected adjusted earnings per share of $6.65. 

Amazon.com rose 1.6% to $177.85 after the online retailer and cloud services provider reported better-than-expected revenue and earnings in the first quarter after advertising revenue soared 24%. 

The company said revenue in the current quarter is expected to range between $144 billion and $149 billion, representing an increase between 7% and 11%. 

The Amazon Web Services business soared 17% to $25 billion, calming the worries that the division's growth had topped out following slower growth last year. 

AMD fell 6.8% to $147.70 after the advanced chipmaker reiterated its full-year outlook, dampening expectations of sales and earnings revisions. 

 

FTSE 100 Index Trades Higher, European Markets Closed for May Day Holiday 

The benchmark index in London edged slightly higher as financial markets in Continental Europe were closed for the May Day holiday. 

The FTSE 100 index opened higher and bond yields held firm in thin trading as most traders were away in Zurich, Paris, Milan, and Frankfurt.

In April, benchmark indexes in London rose about 2.5%, but the DAX CAC-40 indexes dropped about 2% as investors adjusted rate-cut expectations and reacted to local corporate earnings. 

In the absence of local and regional economic news, investors awaited the release of the U.S. Fed's monetary policy announcements later in the day after the close. 

Fed policymakers are widely expected to hold the interest rate range between 5.25% and 5.50%, and investors are awaiting the Fed's direction on the level of interest rates. 

Investors had bid up stocks in the first quarter in the hopes that policymakers were ready to begin rate cuts as early as June, followed by as many as three additional cuts later in the year. 

However, those expectations have been lowered after several economic reports suggested that the U.S. economy and labor market conditions are more resilient than previously expected. 

Moreover, several inflation indicators have stayed above the expectations set by economists, with service inflation staying above 3%, indicating that policymakers may await cooler inflation before lowering rates. 

The lowered rate cut expectations had a direct and negative effect on investor sentiment, driving the U.S. benchmark indexes lower by more than 4% in April. 

 

Europe Indexes and Yields

Financial markets in Frankfurt and Paris were close for the May Day holiday, and the FTSE 100 index in London inched lower by 0.3% to 8,120.97.

The yield on 10-year German bonds edged up to 2.58%; French bonds inched higher to 3.07%; the UK gilts edged higher to 4.38%; and Italian bonds inched lower to 3.87%.

The euro edged higher to $1.066; the British pound inched higher to $1.249; and the U.S. dollar edged higher to 92.06 Swiss cents.

Brent crude decreased $1.97 to $83.99 a barrel, and the Dutch TTF natural gas fell by €0.69 to €28.70 per MWh.

 

Europe Stock Movers

Aston Martin Lagonda Global declined 4.6% to 141.43 pence after the luxury automaker reported a wider-than-expected loss in the first quarter. 

Revenue in the first quarter declined by 26% to £945 million from £1.3 billion; pre-tax losses expanded to £138.8 million from £74.2 million; and net debt increased by 20% to £1.04 billion from £868.1 million a year ago. 

The company said vehicle sales declined in the quarter after it introduced new products, ended production of several core products, and ramped up production of the new Vantage, upgraded DBX 707, and V12 sports car. 

Vehicle sales in the first quarter dropped 26% to 945 from 1,269 units in the corresponding period a year ago. 

Next plc increased 0.1% to 9,020.49 pence after the apparel retailer reiterated its full-year outlook. 

Revenue in the first quarter increased 5.7% from a year ago, driven by an 8.8% rise in online sales and flat in-store sales. 

The retailer projected a full-year 2024 consolidated sales increase of 6% to £6.2 billion, a pre-tax profit rise of 4.6% to £960 million, and an after-tax earnings per share gain of 4.8% to 606.3 pence. 

GSK plc increased 2.2% to 1,706.75 pence after the pharmaceutical company reported a better-than-expected 27% increase in its core operating profit in the first quarter. 

Revenue in the first quarter increased 10% to 7.4 billion, core operating profit soared 27% to 2.4 billion, and earnings per share declined 19% to 25.7 pence. 

The company announced a 15-pence per share cash dividend. 

The pharmaceutical company's full-year sales are likely towards the upper end of its previously announced sales growth range of between 5% and 7%, with core operating profit rising between 9% and 11% and core earnings per share rising between 8% and 10%. 

Domino's Pizza Group PLC decreased 0.7% to 323.40 pence after the company reported weaker-than-expected quarterly results. 

Comparable sales in the first quarter declined by 0.5%, and total orders fell by 0.8% from the previous year, but on a two-year basis, comparable sales rose by 8.4%. 

Total system sales in the first quarter declined 0.4% to £385.1 million from £386.6 million, and total orders on a comparable basis fell 0.8% to 17.7 million from 17.8 million a year ago. 

Total orders fell 1.8% to 17.7 million from 18.0 million. 

 

Japan's Manufacturing Contraction Extends to Eleventh Month

Stocks in Tokyo traded lower in thin trading and erased some of the gains in the previous two sessions as investors remained cautious amid the flood of earnings. 

Market indexes fell in a broad selloff that saw technology and financial stocks leading the decliners following sharp declines in overnight trading in New York. 

Market indexes fell nearly 1% on Wall Street after a measure of wages and benefits rose at the fastest pace in one year at 1.2%, supporting the case for the Federal Reserve to wait longer before lowering interest rates. 

The expectations of fewer and delayed U.S. rate cuts soured market sentiment in New York, overhanging Tokyo trading. 

Japan's manufacturing sector continued to contract for the eleventh month in a row, but at a slower pace in April, S&P Global reported in its final update. 

The au Jibun Japan Manufacturing PMI eased to 49.6 in April from 49.9 in the preliminary estimate and a final 48.2 in March. 

Manufacturing activities contracted at a slower pace in April as output and new orders shrank at a slower pace in the month. 

However, business sentiment was unchanged from March, driven in part by improving demand, the report noted. 

The Nikkei 225 Stock Average declined 0.2% to 38,356.20, and the Topix index dropped 0.3% to 2,733.96. 

Tokyo Electron, Advantest, Screen Holdings, and SoftBank fell between 1.5% and 3.5%. 

Toyota Motor, Honda Motor, and Nissan Motor declined between 0.4% and 1.1%. 

Financial stocks were among the leading decliners, and Mitsubishi UFJ, Mizuho Financial, and Sumitomo Mitsui Financial Group decreased between 0.2% and 1.4%.

Rising travel demand lifted the revenue of three Japanese railway companies, driven by the ending of the travel restrictions imposed during COVID-19 and the return of international tourists. 

East Japan Railway consolidated revenue in the year ending in March rose 13.5% to 2,730 billion yen, and West Japan Railway revenue rose 17.2% to 1,635 billion yen. 

Central Japan Railway revenue surged 22.1% to 1,710 billion yen. 

West Japan Railway increased 8% to ¥3,233.0; East Japan Railway added 3.3% to ¥2,987.50; and Central Japan Railway declined 0.1% to ¥3,614.0. 

 

Lasertec Reports Strong Quarterly Results and Announces Executive Changes

Lasertec Corporation soared 15.8% to ¥40,080.0 after the company reported higher-than-expected sales and earnings in the nine-month period ending in March. 

Consolidated nine-month revenue increased 97.9% to 157.2 billion yen from 79.4 billion yen, ordinary income soared 109.8% to 58.7 billion yen, and diluted earnings per share rose to 460.02 yen compared to 229.53 a year ago. 

The company estimated sales in the fiscal year ending in June 2024 to increase by 27.6% to 195 billion yen, ordinary income to increase by 5.2% to 67 billion yen, and diluted earnings per share to be 543.32 yen. 

The company reiterated its plans to pay a total cash dividend of 191 yen, higher than 180 yen a year ago. 

The company also promoted its chief sales officer, Tetsuya Sendoda, as the new chief executive officer and the current CEO, Osamu Okabayashi, as the new chairman.