Dow cuts nearly 400 points of gain as Fed eyes biggest rate hike since 1994

U.S. stocks rose but were off session highs on Wednesday as investors wondered whether the Federal Reserve would later make the biggest interest rate hike since 1994.

What is happening
  • The Dow Jones Industrial Average DJIA,
    rose 113 points, or 0.4%, to 30,478, after rising 397 points at its session high.

  • The S&P 500 SPX,
    was up 27 points, or 0.7%, to 3,762.

  • The Nasdaq Composite COMP,
    gained 151 points, or 1.4%, to trade at 10,979.

Stocks ended mostly lower on Tuesday, with the Dow Jones and S&P 500 posting their lowest closes since the start of 2021 as the indices extended their losing streak to five days. The Nasdaq Composite rose 0.2%.

What is driving the market

The Federal Reserve will announce an interest rate decision at 2 p.m. Eastern Time, followed by a press conference with Chairman Jerome Powell at 2:30 p.m. ET.

Investors are juggling expectations of an interest rate hike of 50 basis points or even 75 basis points, which economists at Goldman Sachas and JP Morgan are now anticipating. The latter would mark the largest such increase in nearly 30 years.

Surprisingly strong May consumer price inflation data released last week dealt a blow to those who hoped price increases had peaked. It also sparked another rout in stock markets and other assets, pushing the S&P 500 index into bearish territory, amid fears that more aggressive Fed action could push the United States into recession.

“If the Fed surprises with a 50 basis point hike, the market will certainly rebound on relief. But the Fed’s primary goal is to get inflation under control now, not to stimulate stock markets. And depressed market conditions seem necessary to achieve this goal,” said Ipek Ozkardeskaya, senior analyst at Swissquote, in a note to clients.

“Now that the 75 basis point pill has been swallowed by the market, it would be irrational for the Fed not to go ahead with a bigger hike,” she said.

Not everyone is convinced investors would be relieved by a half-percentage-point move.

A 50 basis point move, in theory, should cause stocks to rally, “but it’s really not clear cut,” said Chris Weston, head of research at Pepperstone in Australia. “The market could easily see a risk of the Fed pulling further back from the inflation curve and shifting further into risk aversion mode.”

Lily: An increase of 75 basis points? Here are 3 ways the Fed may appear more hawkish this week

Also see: 75 basis point Fed decision not a slam dunk, ex-staff says

Data on Wednesday showed U.S. retail sales fell 0.3% in May, below forecasts, while sales minus autos rose 0.5%. Excluding automobiles and gas, sales rose 0.1%.

The S&P 500 index has lost 10.2% in the past five trading days, the worst percentage decline since March 2020, when the pandemic was unfolding in the United States

A surprise announcement from the European Central Bank, which held an emergency meeting on Wednesday to “discuss current market conditions,” stole the show on Fed decision day.

The ECB said it would use reinvestments from its expired Pandemic Emergency Purchase Program, or PEPP, to combat widening spreads between yields of highly indebted countries and core countries like India. Germany, while struggling to shape a new instrument designed to combat the “fragmentation” of its monetary policy efforts. Economists had widely predicted markets would test the ECB after policymakers failed to concretely address fragmentation issues last week.

See also: ECB’s inability to deal with threat of ‘fragmentation’ raises risk of bond market sell-off: economists

The rare ad hoc ECB meeting, which comes just a week after the central bank’s meeting, helped push down Italian bond yields and rally the euro EURUSD,
and European stocks SXXP,

Companies in the spotlight
  • Shares of Hertz Global Holdings Inc. HTZ,
    rose 9% after the car rental company announced a new $2 billion share buyback program.

other assets
  • US Treasury yields were falling, with that of the 10-year note BX:TMUBMUSD10Y down 7 basis points to 3.406% after hitting a more than decade high.

  • The ICE US Dollar Index DXY,
    a measure of the currency against a basket of six major rivals, fell 0.2%.

  • Oil futures traded lower, with US benchmark CL.1,
    down 0.8% to trade below $118 a barrel. GC00 gold futures,
    rose 0.5% to trade near $1,822 an ounce.

  • BitcoinBTCUSD,
    saw renewed pressure, falling 4.1% to trade near $21,250.

  • The Stoxx Europe 600SXXP,
    rose 1.6%, while London’s FTSE 100 UKX,
    advanced by 1.4%.

  • The Shanghai Composite SHCOMP,
    ended up 0.5%, while the Hang Seng HSI index,
    rose 1.1% in Hong Kong and Japan Nikkei 225 NIK,
    down 1.1%.

  • GC00 gold price,
    rose $12.20, or 0.7%, to $1,825.70 per ounce and CL00 oil prices,
    fell 1.3% to $117.32 a barrel.

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