Morning Wrap: S&P 500 tumbles as Powell rules out rate cuts for 2023, ASX 200 set to fall

The Fed hikes rates by 25 bps, Powell rules out rate cuts for 2023, US Treasury Secretary Yellen suggests they are not considering insuring all uninsured bank deposits, UK inflation unexpectedly accelerates to 10.4% and despite all that, the market still expects the Fed to cut at least twice by year end.

Let's dive in.

S&P 500 SESSION CHART

Powell’s attempt at a dovish hike sends the market spiraling lower (Source: TradingView)

MARKETS

• Fed hikes rates by 25 bps to 4.75% – 5.0%, in line with consensus and reiterated that there are no changes to 2023 rate expectations

• S&P 500 rallies to session highs of 0.9% shortly after the 5:00 am interest rate decision but press conference sends the market sharply lower

• Fed’s Summary of Economic Projections was little changed, marking down 2023 and 2024 real GDP forecasts and raising core PCE inflation expectations from 3.5% to 3.6%

• Powell notes that “some” additional rate hikes may be appropriate

• Dot plot showed peak rate was unchanged at 5.1% from the December reading and expected to fall to 4.3% in 2024 and 3.4% in 2025

STOCKS

• GameStop (+35.2%) posts its first profit in more than two years, triggers short squeeze (Reuters)

• Nvidia (+1.0%) extends gains as Wall St analysts praise the company’s AI leadership following its developer conference on Monday (CNBC)  

• Nike (-4.9%) beats earnings expectations by more than 40% thanks to better-than-expected 14% YoY revenue growth but gross margins declined on push to clear inventories (CNBC)

• First Republic (-15.5%) is exploring different strategic options, including a possible sale (CNBC) 

BANKING CRISIS

• First Republic rescue may rely on US backing to reach a deal (Bloomberg)

• Warren seeks to tie higher FDIC insurance to tighter regulation (Bloomberg)

• US not considering 'blanket insurance' for bank deposits (Reuters)

• UBS to enter talks with Michael Klein to terminate First Boston deal (FT)

• UBS offers to buy back some of its own bail-in notes (Bloomberg)

ECONOMY

• UK inflation comes in hotter with first increase in five months (Bloomberg)

• ECB's Lagarde vows robust policy and ready to act as needed (Bloomberg)

• Australian growth seen weaker, recession risk rises (Bloomberg)

Deeper Dive

Fed hikes and keeps door open for more

US stocks turned into a classic Powell FOMC day, where the interest rate decision and presser were effectively two separate market moving events.

Some highlights from the presser include:

• Rate cuts: "In that most likely case, participants don't see rate cuts this year. They just don't."

• Rate cuts again: When asked again about rate cuts, "I mentioned with rate cuts, rate cuts are not in our base case. And, you know, so that's all I have to say."

• Goods vs. services inflation: "Goods inflation has been coming down for six months. It's proceeding more slowly than we would have liked. It's certainly proceeding. Housing services is really matter of time passing. We continue to see the new leases being signed at much lower levels of inflation. So that's 44% of the core PCE index where you've got a story that's ongoing. Where we didn't have in February and still don't have now a sign of progress is in the non-housing services sector."

• Future hikes: "Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain .. The committee anticipates that some additional policy firming may be appropriate."

Some other key factors to note:

• GDP: Risks weighted to downside, 0.4% this year and 1.5% next year. Unemployment expected to tick to 4.5% by year and 4.6% in 2024.

• Core PCE: Moderated but pressures continue to high. Forecast to reach 3.3% this year but a long way to go.

• Banking crisis: May weigh on lending, aggregate demand and labour market. If credit conditions tighten, monetary policy may have less work to do

The other thing that may have tanked markets was Treasury Secretary Yellen suggesting that the administration was not considering "anything having to do with blanket insurance or guarantees of deposits."

Fed dot point (Source: Federal Reserve)

Sectors to Watch

The market is on the backfoot after Powell's mixed remarks. We're now back to playing the game recalibrating for the view about no rate cuts this year. However, the market still expects more than two rate cuts in the second half of 2023 and the US 2-year Treasury yield fell 23 bps to 3.93% overnight. So something's got to give: Either market expectations shift up or the Fed moves lower. Anyway, on to some sectors to note (although every S&P 500 sector was red so expect a rather broad-based decline).

Gold: Spot prices climbed 1.5% overnight thanks to softer bond yields and US dollar. Gold stocks have pulled back sharply after a powerful rally on Monday, so let's see if the charts can tighten up.

Tech: The Nasdaq reversed a 1.3% gain to close 1.6% lower. The weakness was more pronounced among our US-listed sector ETFs, with Cloud and FinTech down around 3%.

ASX corporate actions occurring today:

• Trading ex-div: LGI (LGI) – $0.011, Eildon Capital (EDC) – $0.015

• Dividends paid: GR Engineering (GNG) – $0.09, Meridian Energy (MEZ) – $0.054, Insurance Australia Group (IAG) – $0.06, Bega Cheese (BGA) – $0.045, EVT (EVT) – $0.14, TerraCom (TER) – $0.075, HT&E (HT1) – $0.052, oOh Media (OML) – $).03, Ingenia Communities (INA) – $0.052, SmartGroup (SIQ) – $0.15

• Listing: None

Economic calendar (AEDT):

• 11:00 pm: UK Interest Rate Decision