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June 13, 2024

Stocks Stagnant As Investors Await Fed Decision on Rates

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Jan 31, 2024

Markets Lack Direction Ahead of Expected Rate Hike

Global stocks traded sideways on Wednesday as investors held off on major bets ahead of the U.S. Federal Reserve’s latest policy decision, expected to result in another interest rate hike to fight inflation.

MSCI’s gauge of stocks across the globe gained 0.19% after seesawing through much of the session. Wall Street indices wavered between slight gains and losses in early New York trading, while European shares ended flat to higher even after strong earnings from Novo Nordisk.

Investors were keenly awaiting the Fed’s policy statement and Chairman Jerome Powell’s subsequent news conference. Markets overwhelmingly expect an increase of 25 basis points, which would lift the Fed funds target range to 4.5%-4.75%.

“It seems like all eyes are on the Fed right now and most other news or data appears to take a backseat, at least for today,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. “The market expects them to announce a 25 basis point rate increase; investors will be listening closely for clues about what to expect next.”

Upcoming U.S. jobs data on Friday may also influence expectations for further Fed hikes, analysts said.

China Worries Persist, Europe Shows Resilience

Asian shares outside Japan seesawed before closing down 0.5%, dragged by Chinese stocks. The blue-chip CSI 300 index fell 1% to its lowest level since January 2019 after a survey showed China’s factory activity shrank more sharply than expected in January.

“The weakness in China is the biggest story right now and that’s dragging on APAC markets,” said Brian Lan, managing director at Goldman Sachs. “There are still lingering growth concerns, especially with Covid-19 restrictions being loosened and whether that will lead to an increase in cases.”

European stocks proved more resilient as strong corporate earnings took the spotlight off recession fears. The pan-European STOXX 600 rose for a sixth straight session, its longest winning streak in a year, aided by forecast-beating results from Novo Nordisk.

The drugmaker was the top boost on the regional index after raising its sales outlook on strong diabetes drug demand. But stocks pared some gains after data showed euro zone inflation cooled as expected in January.

All Eyes on Fed Guidance

With an interest rate increase largely priced in, investors were parsing Wednesday’s statement and comments for clues on policymakers’ thinking and future rate moves.

Markets will be looking for signs of an impending pause in the tightening cycle and also keeping tabs on commentary around inflation and unemployment, strategists said.

Key Questions Heading Into Fed Decision
Will they signal a pause or further hikes ahead? Markets hope for signs of a near-term pause
How worried are they about a wage-price spiral? Comments on wage inflation, labor market could move needle
Is disinflation trend intact after recent data? January CPI Eaton expect downshift in hawkishness if so

“Essentially investors are trying to figure out how worried the Fed still is about inflation and how that might inform what they do for the rest of the year,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

U.S. labor market strength has been cited as a primary reason for the Fed to remain hawkish, he said, putting extra emphasis on Friday’s nonfarm payrolls report in the wake of recent bumper job openings numbers.

Likelihood of Soft Landing in Question

With the Fed’s targeted federal funds rate now at its highest level since late 2007, economists were debating whether the U.S. central bank can cool inflation without tipping the economy into recession.

Jobs growth has remained surprisingly resilient even in the face of stiff interest rate rises, leaving policymakers hopeful of a “soft landing.” But the factory sector is showing signs of cracking already, strategists noted.

“We expect manufacturing weakness to spill over into services — and unemployment to rise — later this year,” said analysts at Capital Economics.

They forecast two more 25 bp Fed hikes in coming months, with risks skewed toward additional tightening. Markets currently imply a terminal rate just below 5% by June.

Goldman Sachs also said on Wednesday the hurdle for a soft economic landing was “high and rising”. But it raised its forecast for 2023 U.S. GDP growth to 1.1% from 0.9%, saying risks now appeared more two-sided between growth surprises and renewed inflation pressure.

Stocks Seen Rangebound Near Term

With the Fed decision out of the way, equity strategists said stocks appeared set for a period of consolidation as investors parse the latest signals on rates while awaiting fresh catalysts from economic data or corporate earnings.

“In the interim, we advise investors to buckle their seatbelts,” said Commonwealth’s Essele. “We expect continued volatility until more clarity emerges on whether we’ll have a soft economic landing.”

UBS Global Wealth Management retained its neutral stance on developed market equities, noting downside risks from still-high inflation and monetary tightening as well as seasonal weakness around the Lunar New Year.

But stocks would likely rebound later in 2023 if, as expected, major economies avoided hard landings while inflation eased, it said.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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