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Beyond the Numbers

Fed’s New Interest Rate Forecast May Continue To Weigh On Wall Street
6/17/2021 8:56 AM

The major U.S. index futures are pointing to a lower open on Thursday, with stocks likely to see further downside after ending the previous session mostly lower.

A negative reaction to the Federal Reserve’s monetary policy announcement may continue to weigh on stocks after the central bank moved up its timeline for raising interest rates.

The Fed previously predicted that interest rates would remain at near-zero levels through 2023, but the latest projections point to two rate hikes during that year.

The shift in the timeline comes as the Fed also forecast much faster core consumer price inflation this year, although the accompanying statement still attributed the increase in inflation to “transitory factors.”

The statement did not hint at a shift in Fed officials’ thinking about the central bank’s asset purchase program, but the new interest rate forecast still suggests tapering is likely in the coming months.

The Fed’s asset purchase program has been credited with helping to prop up the stock markets during the coronavirus pandemic, with stocks reaching record highs despite significant economic hardship.

Reflecting a negative reaction to the Federal Reserve's highly anticipated monetary policy announcement, stocks finished Wednesday's trading mostly lower. With the drop on the day, the Nasdaq and the S&P 500 pulled back further off Monday's record closing highs.

The major averages climbed well off their lows of the session but still closed in negative territory. The Dow slid 265.66 points or 0.8 percent to 34,033.67, the Nasdaq dipped 33.17 points or 0.2 percent to 14,039.68 and the S&P 500 fell 22.89 points or 0.5 percent to 4,223.70.

The weakness on Wall Street came as the Fed's latest economic projections now point to an increase in interest rates in 2023.

The latest projections from Fed officials suggest interest rates will be increased to 0.6 percent in 2023 compared to previous projections indicating rates would remain at near-zero levels. Seven officials expect a rate hike as soon as 2022.

The forecast for higher rates in 2023 comes as the median estimate for GDP growth in the year was raised to 2.4 percent from the 2.2 percent forecast in March. Core consumer price inflation is still expected to increase by 2.1 percent in 2023.

"We had assumed the Fed would be a little more willing to let inflation rip in favor of ensuring a 'broad and inclusive' labor market recovery - and were only forecasting one 25bp rate hike," said Paul Ashworth, Chief U.S. Economist at Capital Economics. "But we clearly misjudged the Fed's evolving reaction function and tolerance for inflation."

The new estimates also point to 7.0 percent GDP growth in 2021 versus the previously estimated 6.5 percent, with core consumer price inflation expected to reach 3.0 percent compared to the previously forecast 2.2 percent.

Meanwhile, the Fed's accompanying statement was little changed from the April meeting, as the central bank said it plans to continue its bond purchases at a rate of at least $120 billion per month until "substantial further progress" has been made toward its policy goals.

Some analysts had been expecting the Fed to signal that it was beginning to think about tapering its asset purchases in light of the strength of the economic recovery and rising inflation.

In his post-meeting press conference, Fed Chair Jerome Powell said reaching the standard of "substantial further progress" is still "a ways off" and stressed the central bank would provide "advance notice" before making any changes to its asset purchases.

As widely expected, the Fed also maintained its target range for the federal funds rate at zero to 0.25 percent, where it has remained since March of 2020.

The Fed said it expects rates to remain at near-zero levels until labor market conditions have reached levels consistent with its assessments of maximum employment and inflation is on track to moderately exceed 2 percent for some time.

Steel stocks moved sharply lower following disappointing Chinese industrial production data, dragging the NYSE Arca Steel Index down by 2.6 percent.

Significant weakness also emerged among gold stocks, as reflected by the 1.8 percent drop by the NYSE Arca Gold Bugs Index. The index slid to its lowest closing level in over a month, as the price of gold fell sharply in electronic trading.

Interest rate-sensitive utilities stocks also came under pressure on the day, resulting in a 1.6 percent decline by the Dow Jones Utility Average.

Computer hardware, housing, chemical and transportation stocks also saw notable weakness, moving lower along with most of the other major sectors.

Commodity, Currency Markets

Crude oil futures are falling $0.35 to $71.80 a barrel after inching up $0.03 to $72.15 a barrel on Wednesday. Meanwhile, after rising $5 to $1,861.40 an ounce in the previous session, gold futures are plummeting $77.80 to $1,783.60 an ounce.

On the currency front, the U.S. dollar is trading at 110.58 yen versus the 110.71 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1935 compared to yesterday’s $1.1995.

Asia

Asian stocks ended mostly lower on Thursday, as investors reacted to the U.S. Federal Reserve predicting an earlier than expected timeline for a rate hike.

Fed officials projected hikes in interest rates by 2023, a year earlier than previously expected amid the vaccine rollout. The new forecasts boosted the dollar and caused a sell-off of U.S. Treasuries.

Chinese shares rebounded from three straight sessions of losses as data showing slowing factory output growth helped ease fears of policy tightening.

The benchmark Shanghai Composite Index edged up 7.28 points, or 0.2 percent, to 3,525.60, while Hong Kong's Hang Seng Index ended up 34.34 points, or 0.1 percent, at 28,471.18.

Japanese shares ended lower, with drug makers and technology companies underperforming. The Nikkei 225 Index slid 272.68 points, or 0.9 percent to settle at 29,018.33, while the broader Topix closed 0.6 percent lower at 1,963.57.

Medical platform service firm M3 lost 3.6 percent and conglomerate Sony fell 2.3 percent, while banks and insurers advanced as U.S. Treasury yields gained.

Mitsubishi UFJ Financial Group rose 1.2 percent, Dai-ichi Life Holdings advanced 2.5 percent and T&D Holdings added 3.1 percent.

Toshiba gained 1.3 percent after its chairman said he may step down after revamping its board and appointing a new CEO, according to the Wall Street Journal.

Australian markets saw modest losses as commodity prices slipped on dollar strength and amid China's campaign to rein in raw material prices.

The benchmark S&P/ASX 200 Index dropped 27.20 points, or 0.4 percent to 7,359, while the broader All Ordinaries Index ended down 32.90 points, or 0.4 percent, at 7,600.50.

Mining heavyweights BHP and Rio Tinto fell over 1 percent each, while gold miners Evolution Mining, Newcrest, Northern Star Resources and Regis Resources lost 3-5 percent.

Woodside Petroleum, Santos and Beach Energy fell 2-3 percent despite oil prices hitting multi-year highs on optimism over rising global demand. Whitehaven Coal plunged 11.5 percent as the coal producer cut its 2021 production guidance for the fourth time this year.

Coles tumbled 4.5 percent after the supermarket giant told investors it plans to grow its business through a range of new investments.

Banks ANZ, Commonwealth and Westpac gained over 1 percent after data showed job creation in the country blew past expectations in May, with the unemployment rate tumbling to its lowest level since the start of the coronavirus pandemic.

Given soaring house prices, Reserve Bank governor Phil Lowe sounded a warning to the nation's lenders to maintain borrowing standards.

Seoul stocks ended lower to snap a five-day winning streak on hawkish comments from the Fed. The Kospi dipped 13.72 points, or 0.4 percent, to 3,264.96. Market bellwether Samsung Electronics dropped 1.1 percent and No. 2 chipmaker SK Hynix gave up 2.3 percent.

Europe

European stocks have moved mostly lower on Thursday, as investors react to the Fed's hawkish statement and the latest Eurozone inflation figures for May.

Federal Reserve officials on Wednesday projected interest rate hikes by 2023, a year earlier than previously expected amid the vaccine rollout.

Eurostat's final reading on Eurozone consumer price inflation for May came in at 2.0 percent on an annual basis, as estimated earlier. Inflation in the 19 countries sharing the euro rose 0.3 percent month-on-month.

Earlier today, the Swiss National Bank decided to maintain its expansionary monetary policy in order to ensure price stability and provide support to the economic recovery.

The bank repeated that it is willing to intervene in the foreign exchange market as necessary, while taking the overall currency situation into consideration.

While the U.K.’s FTSE 100 Index has fallen by 0.6 percent, the French CAC 40 Index and the German DAX Index are both down by 0.1 percent.

Miners Anglo American, Antofagasta and Glencore have fallen in London as China stepped up its campaign to rein in commodity prices.

Travel stocks are moving higher after reports that Britain may allow those who are double vaccinated against Covid-19 to enjoy a foreign holiday without intrusive red tape.

Automakers have also advanced after industry data showed Europe's passenger car registrations increased sharply in May.

Passenger car sales jumped 53.4 percent year-on-year in May after expanding 218.6 percent in April due to the low base of comparison, the European Automobile Manufacturers' Association said.

U.S. Economic Reports

After reporting decreases in first-time claims for U.S. unemployment benefits for six straight weeks, the Labor Department released a report on Thursday showing an unexpected uptick in initial jobless claims in the week ended June 12th.

The report said initial jobless claims rose to 412,000, an increase of 37,000 from the previous week’s revised level of 375,000.

The increase surprised economists, who had expected jobless claims to edge down to 359,000 from the 376,000 originally reported for the previous week.

Jobless claims had declined in eight out of the nine previous weeks, falling to their lowest levels since March of 2020.

A separate report from the Federal Reserve Bank of Philadelphia showed Philadelphia-area manufacturing activity expanded at a slightly slower rate in the month of June.

The Philly Fed said its diffusion index for current general activity slipped to 30.7 in June from 31.5 in May, although a positive reading still indicates growth in regional manufacturing activity. Economists had expected the index to edge down to 31.0.

Looking ahead, the Philly Fed said most future indicators improved, suggesting that more firms expect overall growth over the next six months.

At 10 am ET, the Conference Board is scheduled to release its report on leading economic indicators in the month of May. The leading economic index is expected jump by 1.3 percent.

The Treasury Department is due to announce the details of this month’s auctions of two-year, five-year and seven-year notes at 11 am ET.

Stocks In Focus

Shares of CureVac (CVAC) are plummeting in pre-market trading after the German biotech company said its COVID-19 vaccine was only 47 percent effective in a late-stage trial.

Jessica Alba's Honest Company (HNST) is also seeing pre-market weakness even though the household products maker reported better than expected results in its first report since going public.

On the other hand, shares of Commercial Metals (CMC) are likely to move to the upside after the steel and metal products company reported fiscal third quarter results that beat analyst estimates.
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