Why did stocks and bonds go into recovery after the Fed raised the jumbo interest rate

Financial markets suffered an absolute bloodbath in the days leading up to Wednesday’s Federal Reserve decision, with stocks falling and bond yields rising in the wake of surprisingly hot inflation data – a sign that investors feared Volcker’s reaction more than Fed Chairman Jerome Powell and the rest. Members of the Federal Open Market Committee.

But now that the dust has settled, it looks like Powell couldn’t help but be himself — and stocks and bonds thanked him for that after the Federal Reserve raised the Fed funds rate by 75 basis points, the largest such move since 1994.

After the initial muted reaction that saw the Treasury yield curve briefly inverted, bond, stock and even cryptocurrency prices surged as Powell left enough wiggle room on how much of a rally investors could expect at the July meeting, where Powell said he could go with 75 points. basis or 50 basis points — and that the Fed, as always, will remain data-driven.

Kenneth J. said: It is a macro hedge fund that manages $18 billion. “In the end he didn’t, he gave himself some choices wisely.”

Rather than shock the markets with a more hawkish tone, Powell was “more diplomatic, more moderate,” Tropin added.

Ultimately, it appears that the market may have outdone itself during the recent sell-off as investors brace for Wednesday’s 75 basis point rally, expectations that appear to have been boosted by a report in the Wall Street Journal on Monday indicating that the massive move was in account.

Some market experts, including Jeremy Siegel of the University of Pennsylvania, responded by calling on the Fed to “take its medicine” and raise an entire percentage. In response to changing expectations, interest rate futures began pricing in 75 basis points not only in June, but also in July, when the Federal Reserve’s Policy Setting Committee will hold its next two-day meeting.

But Tropin said that when it came to that, Powell chose to leave himself enough room to go with a 50 basis point increase in July, and investors applauded.

With that, there is always the potential for more pain in the future. When it comes to the Fed’s “dot plot” and the economic outlook, Allianz’s Mohamed El-Erian said the “front-loading” of interest rate hikes by the Fed as well as the decline in the pace of economic growth point to an “inflationary baseline”. MarketWatch previously wrote more about what this could mean for the markets.

Stocks ended Monday’s session higher, with the S&P 500 SPX,
+ 1.46%
It rose 1.5% to 3789, its first daily gain after a historic five-day streak of losses that saw the large-volume benchmark index plunge more than 10% to trade at its lowest levels since early 2021 as it confirmed its fall into a bear market. Dow Jones Industrial Average DJIA,
+ 1.00%
It rose just over 300 points, or 1%. Nasdaq Composite,
+ 2.50%
It finished 2.5% higher at 11,099. Bitcoin BTCUSD,
+ 3.55%
It ended the day lower, but well off its post-Fed lows.

The Cboe Volatility Index, often referred to as the VIX, ended the day lower at 29.4, but well off session lows as stocks pared gains before the close. However, the index hit a near-term high above 35 earlier this week.

It is worth noting that the yield on the five-year Treasury bonds is TMUBMUSD05Y,
remained above the 30-year Treasuries TMUBMUSD30Y,
While the FOMC forecast does not portend a recession, and Powell denied the central bank’s goal was to cause a recession, the Fed chair said higher unemployment would be a sign that the Fed’s policy prescription was working. .

Overall, though, both bonds and stocks ended the day higher, as the “relief rally” in stocks extended to bonds. Brian Price, head of Investment Management, The Commonwealth, a network of independent trading brokers that has $150 billion under its management.

Rex Notting: The Fed can’t even get the direction of the economy right

Both stocks and bonds are likely to remain volatile, as investors focus on economic data as well as corporate earnings, which will become a factor when second-quarter earnings season begins next month.

“I don’t think the market will find a foothold until inflation comes down,” Price said.

Unfortunately, there is a lot the Federal Reserve can do about it.

“Obviously the Fed can only do so many things that it can only control… there
Other aspects are on the supply side. The Fed can’t really influence
Power supply, hopefully there will be some improvements, he said.

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