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Hawkish Fed & Negative Sentiment

U.S. stocks closed mixed on Friday, 17th June 2022 with the Nasdaq rallying to close up by 1.43%, the S&P 500 up by 0.22%, and the Dow closed slightly lower. 

It was some relief after a volatile week which saw the market gap lower on Monday in anticipation of the Feds raising the funds’ rate by more than 50 basis points. 

Policymakers on Wednesday increased the federal funds rate by three-quarters of a percentage point, to a range of 1.5% to 1.75%, the largest hike since 1994. 

Jerome Powell told reporters at a post-meeting press conference that another 75 basis-point hike, or a 50 basis-point move, was likely at the Fed’s next meeting in July. 

The initial rally after the announcement was completely gone by the next trading day as the market digests the ramifications of this recent move and the moves to come. 

The Dow closed down by 4.8% for the week, its 11th losing week out of 12, while the S&P 500 slumped 5.8% and the tech-heavy Nasdaq also fell 4.8%. For both the Dow and the S&P, it was the worst week so far this year. 

Here are the closing levels on Friday, 17th June 2022:- 

 Last Change  %Change 
Dow Jones 29,888.78. -38.29. -0.13% 
S&P 500 3,674.84 +8.07. +0.22% 
Nasdaq Comp 10,798.35 +152.25. +1.43% 
US 10Y 3.23%   
VIX 31.13 -1.82 -5.52% 

The Federal Reserve’s rate hike of 75 basis points was a surprise to some but not to many. In fact, one can argue the market persuaded them to move in that aggressive manner. In other words, the Fed gave the market what they wanted. 

And why not? Inflation is at a 40-year high, a war is still ongoing in Ukraine, and China is still not completely out of covid zero.

Inflation is what it’s all about and has been for some time. 
Fed policy is now looking more realistic compared to the past. 

Federal Reserve Governor Christopher Waller said he would support another 75-basis-point rate increase at the central bank’s July meeting should economic data come in as he expects.  

Officials forecast rates will rise to 3.4% by December and 3.8% by the end of 2023. Those would both be the highest levels since early 2008, when the U.S. economy was on the cusp of the financial crisis.  

The trick now is how do we navigate the markets going forward? 

A hawkish Fed, more than before, may bring inflation down but may also bring with it a recession. Volatility is not going anyway soon, and neither is the negative sentiment. 

The only way up is if we get some upside surprise in economic numbers that suggest inflation is coming down and that the economy will ward off a recession.  

For now, it seems highly unlikely so be prepared for more down days. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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