Markets leapt higher yesterday as the Fed Chair Jerome Powell calmed tensions with his soothing, yet tough words. The Fed raised its key lending rate by ½ a percentage, the largest gain since 2000…it was expected.
Flawless execution. The market created the script and the Fed followed it to the letter. There was a time when it was the central bank that muscled the markets, but the roles have reversed. Let’s dive in, shall we? Yesterday was an historic event. With dangerously high inflation looming and geopolitical risk heating up, the Fed is the center of attention for the markets. How would it walk the fine line between raising rates, essentially applying the brakes, without stalling the economy and spooking the markets? In truth, markets were already spooked as evidenced by the high volatility seen in the past several months. Investor nervousness was due in large part to the unknown of what the Fed might do, and all that tension would come to a head at yesterday's announcement and presser that followed.
As expected, the Fed raised its overnight lending rate by + 50 basis points (50 100th, or ½ a percent), bringing it up to 75 basis points. Markets were factoring in almost a 100% probability of the move, though there was a slight chance of a +75 basis point increase, which was a source of tension. The Fed also announced that it would begin to decrease in size, its bloated, $9 trillion balance sheet starting in June. For the first three months, the Fed will reduce its bond holdings by $47.5 billion. Beyond that the Fed will cap its monthly reduction at $95 billion until it feels that it contains, as it put it, “ample reserves.” This too was largely expected by the markets. All in all, the policy statement along with the policy itself was right on target. Then came the Chairman’s press conference.
Powell, first, made it clear that the Fed understands the pain associated with the rampant inflation Americans are feeling. Check. On the fear that the Fed might start shifting rates higher in +75 basis point increments, Powell quashed it by saying that moves of that magnitude are not even being considered at the moment. Double check. The Fed is aware that the Ukraine war and Chinese COVID lockdowns are applying upward pressure on prices and monitoring them closely. Check. Chairman Powell pointed to the 2-year Treasury Note yield, implying that it reflected the Fed’s policy goals. Check. If required, the Fed would become even more aggressive to fight inflation. Check. Responding to the fear that the Fed would cause the economy to go into a recession, Powell argued that there is a realistic path that did not include a recession (aka a soft landing).Triple check.
On the whole, the Chairman left markets with the impression that it was going to be tough on inflation, but that it would act with reasonable and measured force. No surprises…for now. Markets now expect the Fed to move in ½ point steps to bring the Fed Funds rate up to around 2.5%. That is what many believe to be the “neutral rate” or r* (pronounced r-star). At that rate, the economy is neither being stimulated nor slowed. The result was the largest single-day rally for stocks since 2020. It is important, however, to note that inflation is still raging on and that a key driver of that inflation continues to be supply-based difficulties, including $108 / barrel crude oil and continued supply chain holdups. Neither of those can be fixed by the Fed’s rate hiking or bond selling. I have mentioned this multiple times in my writing, and the Fed Chairman agreed yesterday, stating that Fed policy is consumer, or demand oriented, and it has little or no effect on supply. Check?
WHAT’S SHAKIN’
Albemarle Corp (ALB) shares are higher by +14.23% after the Lithium producer announced that it blew away EPS and Revenue estimates by +40.05% and +8.19% respectively. The company raised its full year EPS guidance due to strong demand for its products, specifically Lithium and Bromine. Dividend Yield: 0.7%. Potential average analyst target upside: +14.2%.
Etsy Inc (ETSY) is lower by -11.2% in the pre-market after it announced that it beat EPS and Revenue estimates by +29.78% and +0.64% respectively. The company offered guidance for the current quarter that was below analyst expectations, citing “macroeconomic headwinds.” Potential average analyst target upside: +66.4%.
ALSO, THIS MORNING: Air Products (APD), EPAM Systems (EPAM), Westrock (WRK), SeaWorld Entertainment (SEAS), Becton Dickinson (BD), and CommScope (COMM) all beat on EPS and Revenues.
ON DECK BEFORE THE OPENING BELL: Zoetis (ZTS), Wayfair (W), Penn National Gaming (PENN), Nikola (NKLA), Crocs (CROX), Parker-Hanafin (PH), Royal Caribbean Cruises (RCL), Apollo Global Management (APO), and Kellogg (K).
YESTERDAY’S MARKETS
Stocks vaulted higher yesterday as the Fed policy threw no surprises and the Chairman suppressed fears of recession. The S&P500 gained +2.99%, the Dow Jones Industrial Average climbed by +2.81%, the Nasdaq Composite Index rose by +3.19%, and the Russell 2000 advanced by +2.69%. Bonds gained and 10-year Treasury yields fell by -4 basis points to 2.93%. Cryptos gained +7.37% and Bitcoin added +5.33%.
NXT UP