Premarket stocks: Why the Federal Reserve’s relief might be short-lived
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber ? You can register here. You can listen to an audio version of the newsletter by clicking on the same link.
When the Federal Reserve decides it needs to continue the biggest interest rate hike since 2000, you wouldn’t expect a celebratory moment on Wall Street.
But that’s exactly what happened on Wednesday.
The S&P 500 jumped 3%, recording its best day in nearly two years. The Dow Jones rose 2.8% and the Nasdaq Composite climbed 3.2%.
Breakdown: Federal Reserve Chairman Jerome Powell has made it clear that the central bank plans to crack down quickly to fight inflation. The Fed raised its key rate by half a percentage point for the first time in 22 years, bringing it between 0.75% and 1%.
“I would like to take this opportunity to speak directly to the American people,” Powell said at the start of his press conference. “Inflation is far too high and we understand the difficulties it is causing, and we are acting quickly to bring it down.”
But investors were relieved that he ruled out interest rate hikes of an even larger magnitude.
There had been speculation that the Fed might opt for a three-quarter point hike at an upcoming meeting as it tries to catch up. A half-percentage-point hike is already double what the Fed normally takes.
Paul Donovan, chief economist at UBS Global Wealth Management, said it was never credible to believe a hike of this size was really on the table.
The market “fed on its own hysteria,” he told me.
Powell’s remarks provided some clarity at a time when the Fed’s next moves are incredibly uncertain. Yet, given the complexity of the broader economic environment, collective expiry could prove premature and markets could experience greater volatility.
The Fed wants to limit price increases without raising rates to the point of causing a recession. It’s a tough move, especially as the global economy slows and soaring energy prices and the war in Ukraine cloud the outlook. These are factors over which the Fed has little control.
Donovan expects the Fed to raise rates an additional 0.5 percentage points in June. After that, however, everything seems more messy.
“The later we get to this year, the less likely the Fed is to raise rates,” Donovan said, noting that the closer the Fed gets to a “neutral” rate that no longer supports the economy, the more the Fed is cautious. will have to be to avoid making a political mistake.
If the pessimism about the effects of inflation on economic growth is exaggerated, the Fed could continue to tighten quickly. But if there are signs that a drop in spending is once again generating job losses, he might be inclined to think about reversing the trend. There is room for error in both directions.
Big Picture: The market’s one-day rally does little to change the complex dynamics that investors need to consider when evaluating stocks right now.
“It seems wishful thinking, at least now, to expect the Fed to put monetary policy in the needle’s eye and deliver a soft landing,” ING strategists said in a note on Thursday. to customers.
Not just the Fed: the world’s major central banks are in an equally tricky position. The Bank of England raised interest rates on Thursday for its fourth consecutive meeting. India, meanwhile, just raised rates at an unscheduled meeting in a surprise move.
After being battered during the pandemic, Uber’s business is back on track.
The latest: The company said Wednesday its revenue rose 136% to $6.9 billion in the first three months of the year, beating Wall Street expectations.
“After two years of persistent and sometimes unpredictable impacts on our business, our [first quarter] the results resoundingly affirm that we are on track to emerge from the pandemic,” CEO Dara Khosrowshahi told analysts.
The company’s ride-sharing unit has completely bounced back to where it was in 2019, he added.
Lyft’s results, which arrived a day earlier, were less rosy. Company revenue increased 44% to nearly $876 million. It was down 10% compared to the last three months of 2021.
Worries over the outlook for Lyft (LYFT) drove shares of both companies lower. Lyft (LYFT) said it plans to invest more in pilot research to “further rebalance our market.”
Uber shares fell nearly 5% on Wednesday. Lyft shares plunged almost 30%.
Watch this space: Uber’s ride-hailing business is now about the same size as its food delivery business, which it grew significantly during the pandemic. Revenue from each unit was about $2.5 billion last quarter.
The rally after Wednesday’s Fed decision was good news for investors who were struggling to get excited about the stock market.
But if stocks continue to rise, the Fed itself might be unhappy.
The central bank wants stocks and bonds to keep selling, former New York Federal Reserve Chairman Bill Dudley told my CNN Business colleague Matt Egan.
If financial conditions tighten organically, that means the Fed has less work to do, he explained.
“The less the market reacts to the Fed, the more the Fed has to do,” Dudley said. “The more the market reacts, the less the Fed has to do.”
In other words, if borrowing costs weren’t already rising and the stock market still looked particularly frothy, the Fed would have to telegraph even more dramatic action.
“The Fed should be pleased that the shift in its monetary policy plans has begun to affect bond and stock prices in a way that will make it easier for it to control an overheated economy,” Dudley said.
What happens next: will conditions continue to tighten? Time will tell us. The S&P 500 is in the green this week for the first time since early April.
Kellogg (K), Nikola and Papa John’s (PZZA) announce their results before the opening of the American markets. Cloudflare, Corsair Gaming, DoorDash, Live Nation and Zillow (Z) follow after the close.
Also today: Initial US unemployment claims for the past week arrive at 8:30 a.m. ET.
Coming tomorrow: the US jobs report for April. Economists polled by Refinitiv expect to hear that 391,000 jobs were added last month.