(Bloomberg) — The highly anticipated Federal Reserve decision is making traders take a more cautious stance, with the focus on a potential shift in the central bank’s projections for rate hikes in the years to come.
Stocks dropped, while the dollar and bonds fluctuated. Policy makers are expected to pencil in two interest-rate increases in 2022, forecast three moves in 2023 and two more in 2024, with rates reaching 1.9% that year. That represents a somewhat steeper rate path than the Federal Open Market Committee projected in September. Moreover, officials are poised to accelerate their removal of monetary stimulus as a step toward the first hike since 2018 to tame stubbornly high inflation.
Read: Do You Dot Plot? Understanding How the Fed Forecasts: QuickTake
The panel will release a statement and forecasts, including the “dot plot” that includes central bankers’ projections on interest rates, at 2 p.m. in Washington. Chair Jerome Powell will brief reporters 30 minutes later. The markets’ reaction will largely come down to his comments on how fast the Fed projects a liftoff, how steep a trajectory it sees and when it plans to begin its balance-sheet runoff.
As investors braced for the Fed decision, the S&P 500 fell for a third day, on pace for its longest losing streak since October. The tech-heavy Nasdaq 100 underperformed major benchmarks, while the NYSE FANG+ Index of giants such as Apple Inc. and Tesla Inc. sank. The gauge was also dragged down by shares of some Chinese firms listed in the U.S. like Alibaba Group Holding Ltd. and Baidu Inc., which slid on concerns the U.S. will hit more companies with investment and export sanctions.
Comments:
- “If the FOMC’s dot plots point to a more aggressive tightening cycle, then that would really surprise the markets. If so, we could see further falls for equities, especially growth stocks in the technology sector, and the dollar’s uptrend could accelerate,” said Fawad Razaqzada, an analyst at ThinkMarkets.
- “With several officials coming out in favor of faster tapering, it’s clear that there will be a hawkish shift in the 2022 dots,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.
- “The conversation’s moved from ‘when does the Fed hike?’ and even ‘how many hikes in 2022?’ to really ‘how many hikes does the Fed needs to do over the coming two years or even three years to ensure that inflation goes back to its target?’,” said David Bianco, chief investment officer of the Americas at DWS Group.
While the potential for a faster hike timeline caused recent market volatility, investors seem to have digested that possibility, according to Seema Shah, chief strategist at Principal Global Investors. She also noted that history does not suggest that rate increases are a reason to believe that a correction in stocks is imminent.
The S&P 500’s average annual total return was 10.5% from 2004 to 2006 — when the Fed embarked on “a significantly sharper hiking cycle” than the four to six increases her firm anticipates for 2022-2023, Shah noted. During the rate liftoff in 2016-2018, the stock benchmark averaged 9.8% annually, she added.
A key gauge in the bond market that measures the gap between yields on inflation-adjusted Treasuries and those on regular securities suggests the Fed will be challenged to get inflation down toward its 2% target. Five-year breakeven rates, which hit a record high last month, are currently around 2.7%.
Read: Senate Democrats Weigh Fallback Plan for Delay on Biden Agenda
Other corporate highlights:
- Lowe’s Cos. delivered a revenue outlook that missed analyst estimates and said it expects home-improvement demand to slow next year.
- Eli Lilly & Co. raised its 2021 earnings and revenue forecast and said it expects 2022 sales in a range of $27.8 billion and $28.3 billion, sending shares up the most since June.
Investors also monitored the latest developments on the omicron coronavirus variant. Anthony Fauci, who serves as a medical adviser to President Joe Biden, said on a briefing Wednesday that studies so far show strong antibody responses from existing boosters, though protections against omicron are weaker with just two doses. The strain could make up about 13% of Covid-19 cases in New York and New Jersey, projections from the Centers for Disease Control and Prevention show.
Read: U.K. Covid Cases Hit Record High as Omicron Outbreak Accelerates
Here are some key events this week:
- BOE rate decision, Thursday.
- ECB rate decision, Thursday.
- U.S. housing starts, initial jobless claims, industrial production, Thursday.
- BOJ monetary policy decision, Friday.
- S&P Dow Jones Indices quarterly rebalance effective after markets close, Friday.
- “Quadruple witching” day in the U.S. market, when options and futures on indexes and equities expire, Friday.
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.1% as of 1:37 p.m. New York time
- The Nasdaq 100 fell 0.6%
- The Dow Jones Industrial Average was little changed
- The MSCI World index fell 0.2%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1257
- The British pound fell 0.2% to $1.3211
- The Japanese yen fell 0.2% to 113.96 per dollar
Bonds
- The yield on 10-year Treasuries advanced one basis point to 1.45%
- Germany’s 10-year yield was little changed at -0.36%
- Britain’s 10-year yield advanced one basis point to 0.74%
Commodities
- West Texas Intermediate crude fell 0.4% to $70.43 a barrel
- Gold futures fell 0.5% to $1,763.20 an ounce
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