Traders hope for rate cuts, Nasdaq tops out?

Stocks ticked lower, led by Nasdaq, after the Fed’s expected 25 basis point rate hike today. Uncertainty remains on whether another increase is coming, and when rates will start to decline. Tech stocks took a breather in July, after a 40% year-to-date gain, being flat overall in the past several days. Earnings reports for Big Tech have been mixed in the past few days: Alphabet and Microsoft both beat earnings expectations, but while the former rallied the latter sold off. Oil prices fell on profit-taking in what still appears to be a bullish uptrend.

Bottom-line: Risk-off.

TODAY’S MAJOR NEWS

Fed hike number one, will number two follow?

The Federal Reserve unanimously raised the target range for its benchmark interest rate by 0.25% today, and said that inflation risks remain “elevated.” It left the door open to another rate hike, waiting to review the impact of previous rate hikes on the economy and financial markets. In its statement, the Fed made this wait-and-see policy clear:  “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The Fed had signaled that two more rate hikes were possible in the second half of the year, based on higher expectations for core inflation, expected to end the year around 4%, double the Fed’s inflation target. This is the Fed’s first raise in what many thought would be the two raise end-game, but markets are still pricing in low probability of the second increase.  Fed Futures favor unchanged rates through year end, with the next FOMC meeting two months away. Only 20% probability is placed on a quarter point rate hike at September’s meeting. A second rate hike might still surprise markets.

US oil stocks fall in July, putting demand pressure on the sector

• US commercial crude oil stocks, ex the Strategic Petroleum Reserve, fell by 0.6 million to 456.8 million barrels in the week ending July 21, 2% above the five-year average for mid-July
• Gasoline stocks dropped by 0.8 million barrels last week, 7% below seasonal levels.
• Distillate stocks fell by 0.2 million barrels, 14% below levels typically seen at this time of year
• Ethanol stocks were unchanged last week at 23.2 million barrels, slightly below the 23.3 million barrels on hand in the same week last year

Investor confidence rose in July, Europe still favored region

• The State Street Investor Confidence Index rose to 96.2 in July, up from 95.4 last month
• The increase was led by a 1.3-point increase in the North American index to 90.8, lowest of the three major regions
• The European index fell 5.4 points to 99.5, reflecting further erosion in confidence in the European economy
• The Asian index rose 0.7 points to 97.3

US Home sales fall in June

• US new home sales fell to an annualized rate of 697,00 units in June, well below an anticipated 727,000
• May’s sales number was revised down to 715,00, down from the 763,00 originally reported

TODAY’S MAJOR MARKETS

Equity markets

• Markets fell ahead of the Fed announcement, led by the 0.4% fall in Nasdaq, a 0.2% fall in the S&P 500, with the more defensive Russell 2000 up 0.4%
• Global markets were in the red, with the DAX down 0.7%, the FTSE off 0.2%, and the Nikkei 225 unchanged
• The VIX, Wall Street’s fear index, was unchanged at 13.9

Currencies and Bonds

• The dollar index was unchanged against a basket of currencies, at 101.3
• Sterling and Euro dollar cross rates were largely unchanged while the Yen fell 0.3%
• Bonds weakened ahead of the Fed announcement, with yields on 2- and 10-year Treasuries up to 4.89% and 3.89% respectively

Commodities

• Crude oil prices fell 1.1% on profit-taking, to $79.8 per barrel
• Silver rose 0.6% to $25.0 per ounce, while gold rose 0.3% at $1,970 per ounce
• Grain and oilseed prices saw profit taking after recent ‘Ukraine-induced’ strength

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]