Stock Bull Run Breaks Record on Fed Decision Day: Markets Wrap

June 12, 2024

4 minutes read

(Bloomberg) — Stocks hit fresh all-time highs as the Federal Reserve did little to alter Wall Street’s bets that interest rates will drop at least twice in 2024 — even after the central bank’s more conservative outlook.

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The S&P 500 topped 5,400 for the first time in its history, with Wednesday marking the 20-month anniversary of the bull market. While Treasury yields did pare their slide after the central bank decision, Fed swaps still point to rate cuts in November and December. The dollar fell against all of its developed-world counterparts.

Fed officials penciled in just one rate cut this year and forecast more cuts for 2025, signaling policymakers are in no rush to reduce borrowing costs. “The most-recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective,” Chair Jerome Powell said.

“This is a nothing-burger Fed meeting,” said David Russell at TradeStation. “They know conditions are improving, but don’t need to rush with rate cuts. The strong economy is letting Jerome Powell wring inflation out of the system without hurting jobs. Goldilocks is emerging — but policymakers don’t want to jinx it.”

A few hours before the Fed decision, data showed the core consumer price index cooled to the slowest pace in more than three years.

In a session marked by strong trading volume, the S&P 500 rose almost 1%. Big tech consolidated its leadership, with Tesla Inc. and Nvidia Corp. rallying at least 3.5%. Gains were also fueled by blowout earnings from Oracle Corp., which soared 13%. Lower bond rates also helped, with 10-year yields down eight basis points to 4.33%.

Wall Street’s Reaction to Fed:

Jay was purposely noncommittal on giving any opinion on the timing of a possible cut and I see no chance that he was one of the dots expecting two.

Whether they cut once or twice after 525 bps of rate increases since March 2022? Who cares. It’s what happens next year and if the cuts are aggressive, it will be because the economy deteriorates notably, more so than if inflation further slows.

The Summary of Economic Projections was hawkish as it implies only one cut — but the statement did acknowledge “modest” progress on inflation. The press conference was neutral as this morning’s low inflation print was hard to ignore.

The Fed chair – who we think submitted a two-cut dot himself – is keeping the door very much open to a September cut — provided that the May downshift is broadly sustained in the next few months.

Powell’s presser fine-tunes to a 1.5 cut signal — we still see thin baseline of two.

The fact that there is only one cut penciled in for 2024 might lead to some speculation around path dependency.

Conditions can change. Today’s inflation data are laying the groundwork. This statement notes “modest further progress” on the Fed’s inflation goals.

The Fed’s acknowledgement of “modest progress” towards the 2% inflation target likely stems from the disinflationary signals in May’s CPI data, which contrasts with the first quarter’s higher-than-expected inflation readings.

This is most likely a function of not wanting to ease financial conditions unnecessarily as the data-dependent Fed requires a series of cooler inflation reports before initiating a rate-easing cycle.

These “dot plot” projections likely don’t account for the latest May inflation data, which was softer than expected and reversed some of the heat we saw in the first quarter. We still think the odds are high for two rate cuts in 2024 if the disinflation process continues, as we expect.

In short, the Fed made their decision-making process fairly clear coming into today’s meeting, and their policymakers are reacting to incoming data in a manner that is consistent with that process. If inflation continues to moderate, as has been the trend over the last year and a half, the Fed will start to cut interest rates in the second half of 2024.

Corporate Highlights:

Broadcom Inc., a chip supplier for Apple Inc. and other big tech companies, rallied in late trading after its latest results and annual forecast topped estimates, lifted by robust demand for artificial intelligence products.
The GameStop Corp. calls that Keith Gill — known online as “Roaring Kitty” — purported to own traded huge volumes late Wednesday as the firm’s shares dove in the final stretch of trading.
Caterpillar Inc. hiked its dividend by about 8% and added $20 billion to its share buyback program after seeing strong performance from its division best known for making iconic yellow heavy-duty machinery.
FedEx Corp. plans to cut as many as 2,000 jobs in Europe, the latest move by the package-delivery giant to streamline its global workforce and rein in costs.
Southwest Airlines Co.’s chief executive officer is resisting pressure to step down after activist firm Elliott Investment Management took a $1.9 billion stake and called for new leadership at the carrier.

Key events this week:

Eurozone industrial production, Thursday
US PPI, initial jobless claims, Thursday
Tesla annual meeting, Thursday
New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
Bank of Japan’s monetary policy decision, Friday
Chicago Fed President Austan Goolsbee speaks, Friday
US University of Michigan consumer sentiment, Friday