The S&P 500 jumped to its highest level in 13 months on Monday as traders hoped the Federal Reserve will skip hiking rates when the central bank decides on policy Wednesday. The S&P 500 added 0.93% to close at 4,338.93, with gains steadily increasing throughout the trading day. The benchmark surpassed its high from last August and …
The S&P 500 jumped to its highest level in 13 months on Monday as traders hoped the Federal Reserve will skip hiking rates when the central bank decides on policy Wednesday.
The S&P 500 added 0.93% to close at 4,338.93, with gains steadily increasing throughout the trading day. The benchmark surpassed its high from last August and reached the best intraday and closing levels since late-April 2022. The Nasdaq Composite popped 1.53% to finish the day at 13,461.92, also reaching its highest levels since April 2022. The Dow Jones Industrial Average climbed 189.55 points, or 0.56%, to close at 34,066.33.
Markets have come to expect that the Fed will skip a rate increase at this week’s meeting, with traders pricing in a roughly 72% chance that there will be no hike, according to the CME Group’s FedWatch tool. The Fed has hiked 10 consecutive times since starting this latest policy-tightening cycle in March 2022.
Tuesday’s inflation data could help reinforce the case that inflation is subsiding, as economists expect the consumer price index to show inflation dropping to a 4% annual rate in May. That’s down from 4.9% in the prior month.
The central bank will ultimately decide to skip a rate hike for June, according to Certuity co-chief investment officer Dylan Kremer, but the Fed likely isn’t done raising rates overall.
However, market expectations are that Fed officials will emphasize a commitment to keep inflation at bay and come back with a final rate increase at July’s meeting before going on hold for the rest of the year.
Nikkei leads on Fed bets
It was a mixed Tuesday morning session for the Asian markets. The Nikkei and the Hang Seng enjoyed a bullish morning while the ASX 200 struggled for direction. There were no US economic indicators from Monday to influence, while a bullish US session supported the broader Asian equity markets.
Investor bets on softer US inflation and a Fed pause this Wednesday drove demand for riskier assets. Economists forecast the US annual inflation rate to soften from 4.9% to 4.1%, supporting a Fed pause.
The probability of a June rate hike fell from 29.9% to 18.5% this morning, according to the CME FedWatch Tool. However, the chance of a 25-basis point July Fed rate hike increased from 52.8% to 59.1%. Significantly, bets on a 50-basis point July interest rate hike fell from 17.1% to 11.9%.
This morning, economic indicators from Australia sent mixed signals, while manufacturing numbers from Japan were bullish. The ASX 200 struggled in response to disappointing business confidence numbers.
However, PBoC action provided support, with China’s central bank cutting the seven-day reverse repo rate from 2.00% to 1.90%.
ASX200In morning trade, Japan’s benchmark Nikkei 225 fell 0.2% to 32,323.31. The S&P/ASX 200 in Australia was almost unchanged, rising by less than 0.1% to 7,316.60. The Kospi in South Korea rose roughly 1.0% to 2,598.96. The Hang Seng in Hong Kong fell 0.4% to 19,105.19, while the Shanghai Composite fell 0.4% to 3,247.64.
Clifford Bennett, chief economist at ACY Securities, described the Chinese export figures as “rather alarming,” saying that it was the largest decrease in three years and represented the global economy, not just China.
“Global demand is falling precipitously,” he explained.
“We are now very likely to be surprised by how severe this global economic slowdown becomes.” The world’s three largest economies — the United States, China, and the European Union — are driving the downward trend.”
On Wall Street, the S&P 500 plummeted 19.06 points, or 0.4%, to 4,499.38, and was nearly three points worse at one point. It was the index’s sixth fall in the last six days after it soared during the first seven months of the year.
The Dow Jones Industrial Average slid 158.64 points, or 0.4%, to 35,314.49 after paring a 465-point fall. The Nasdaq Composite Index fell 110.07 points, or 0.8%, to 13,884.32.
Bank stocks in the United States plummeted after Moody’s downgraded the credit ratings of ten smaller and midsized banks. It cited a number of financial worries, ranging from the effects of increasing interest rates to the work-from-home trend that is leaving office buildings idle.
In order to slow inflation, the Federal Reserve raised its key interest rate to its highest level in more than two decades. High interest rates work by simply slowing the entire economy, raising the chance of a recession.
Banks have been particularly heavily hit by the significantly higher rates.
While downgrading credit ratings for ten banks and reviewing six others, Moody’s said the quick rise in rates has created conditions that have harmed the overall industry’s revenues.
Higher interest rates also reduce the value of bank investments made while interest rates were extremely low. Such circumstances contributed to three high-profile bank collapses in the United States this spring, which damaged faith in the system.
Moody’s also predicted difficulty for banks with a large portfolio of commercial real estate loans, which are under threat as work-from-home trends keep workers away from workplaces.
“This comes as a mild US recession is on the horizon for early 2024, and asset quality looks set to decline from solid but unsustainable levels,” wrote Moody’s Jill Cetina and Ana Arsov in a research.
One of the banks whose credit ratings were reduced was M&T Bank, which declined 1.5%. Northern Trust, one of the institutions under examination by Moody’s for a possible rating, declined 1.6%.
Other, larger banks with unaffected credit ratings also fell. Bank of America fell 1.9%.
The US government will issue consumer and wholesale inflation figures later this week, which could impact what the Federal Reserve does next with interest rates.
On Wall Street, the belief is that the drop in inflation since it surpassed 9% last summer will persuade the Fed that no further rate hikes are required. Economists anticipate that consumer prices grew 3.3% year on year in July, accelerating from June’s 3% inflation rate.
However, several economists and investors believe that the final push to the Fed’s 2% target will be the most challenging. They argue that Wall Street was too fast to believe in a “soft landing” for the economy, and that the S&P 500’s 19.5% gain during the first seven months of this year was exaggerated.
In the bond market, the 10-year Treasury yield dipped to 4.02% from 4.10% late Monday. It contributes to the determination of mortgage and other lending rates.
The two-year Treasury yield, which more closely matches Fed predictions, fell from 4.79% to 4.75%.
In the oil market, benchmark US crude fell 13 cents to $82.79 a barrel. Brent crude, the worldwide benchmark, dropped 9 cents to $86.08 a barrel.
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