Tech companies led a broad rally for stocks on Wall Street on Wednesday as investors hailed another interest rate hike by the Federal Reserve, a sign the central bank is stepping up its campaign to combat soaring coronavirus. inflation.
In a widely expected move, the central bank raised its key rate by three-quarters of a point, taking the rate to its highest level since 2018.
At a press conference, Chairman Jerome Powell suggested that the Fed’s rate hikes had already been successful in slowing the economy and possibly easing inflationary pressures. Some on Wall Street saw this as a signal that the Fed might not have to hike rates as aggressively in the coming months, sparking a rally in the final hour of regular trading.
The S&P 500 climbed 2.6% and the tech-heavy Nasdaq jumped 4.1%, its biggest gain in more than two years. The Dow Jones Industrial Average rose 1.4%. Smaller company stocks also rose, pushing the Russell 2000 up 2.4%.
Bond yields fell overall after the Fed announcement. The two-year Treasury yield, which tends to move with Fed expectations, fell to 2.98% from 3.06% on Tuesday night. The 10-year yield, which influences mortgage rates, fell from 2.79% to 2.77%.
Rate hikes like Wednesday’s, the fourth so far this year, make borrowing more expensive and slow the economy. The hope is that the Fed and other central banks can deftly find the middle ground where the economy slows enough to whip inflation but not enough to cause a recession.
“The Fed raised rates the expected 75 basis points, but recognized that the economy was slowing while the labor market remained strong,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. “The statement is mildly dovish and reinforces the tech-led stock market rally that began this morning.”
Some Wall Street analysts were less optimistic that the Fed might opt for more moderate rate hikes from here, especially as inflation accelerated to 9.1%, the annual pace fastest in 41 years.
Charlie Ripley, senior investment strategist at Allianz Investment Management, called the rise “justified”.
“That being said, recent economic data now introduces a higher degree of uncertainty around the policy path as we move forward from here,” Ripley said.
In a note Wednesday, Citi analysts said that while Powell had mentioned a slowdown in the upside would be appropriate at some point, exactly when that might be remains undetermined, adding that they “would not view it as a particularly accommodating comment”.
“We continue to expect underlying inflation to push the Fed to increase more aggressively than either they or the markets anticipate,” the analysts wrote, noting that they expect the Fed to announce another three-quarter point hike at its September policy meeting, with further rate hikes continuing. until early 2023.
The S&P 500 rose 102.56 points to 4,023.61. The Dow gained 436.05 points to close at 32,197.59. The Nasdaq rose 469.85 points to 12,032.42, and the Russell 2000 took 43.09 points to end at 1,848.34. The indices are now all on pace for a weekly gain, extending Wall Street’s strong rally in July. The S&P 500 is up 6.3% so far this month.
It is not uncommon for stocks to rally when the Fed issues a new statement on interest rate policy, only to sell off the next day.
Stocks have been choppy this week after solid gains last week, mainly fueled by better-than-expected corporate earnings reports.
However, inflation remains at the forefront of investors’ concerns. Markets were spooked on Monday after retail giant Walmart warned that its profits were hurt by rising food and gas prices, which are forcing shoppers to cut more profitable discretionary items such as clothes.
The retailer’s mid-quarter profit warning was rare and raised concerns about how the highest inflation in 40 years is affecting the entire retail sector.
Meanwhile, parts of the economy are already slowing because the Fed raised rates, particularly the housing sector. Sales of previously occupied U.S. homes slowed in June for the fifth consecutive month as mortgage rates rose sharply this year. Expectations of higher headline rates have pushed up the 10-year Treasury yield, which is influencing mortgage rates.
Investors kept an eye on the latest batch of corporate earnings reports on Wednesday, including strong earnings from the owner of Google, Alphabet and Microsoft.
Shares in Microsoft and Google parent alphabet rose 6.7% and 7.7%, respectively, after their latest quarterly reports. Boeing shares rose 0.1% after the aerospace company said it delivered more planes in the first quarter than it has since the start of the pandemic.
Technology and communications services stocks were a big part of S&P 500 gains. Nvidia rose 7.6% and Netflix added 6%.
Retailers, restaurant chains, and other businesses that rely on direct consumer spending have also helped boost the market. Chipotle Mexican Grill jumped 14.7% after the restaurant chain reported second-quarter profits that beat analysts’ forecasts.
Spotify technology jumped 12.2% after the music streaming service reported monthly active user and premium subscriber counts that exceeded high street expectations.
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