The S&P 500 posted its biggest two-day rally since April 2020.
Stocks closed near session highs after Federal Reserve Chairman Jerome Powell struck a more positive tone on the outlook for economic growth as the central bank raised interest rates for the first time. since 2018. Bonds have fallen.
The S&P 500 posted its biggest two-day rally since April 2020, with Powell saying the “economy is very strong” to handle tighter policy and the likelihood of a recession is “not particularly high” . Treasury yields rose, led by rates at the front end of the curve. Swaps tied to policy announcement dates at one point indicated that at least 75 basis points of hikes would take place over the next two meetings, suggesting that one of the central bank’s anticipated moves could be larger than the standard size by 25 basis points.
The Fed raised rates by a quarter of a percentage point on Wednesday and signaled hikes in the six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades even as risks to the economic growth increases. The central bank said it would start allowing its $8.9 trillion balance sheet to contract at an “upcoming meeting” without giving further details. Powell said officials have made good progress this week in defining their plans and may be able to begin the process when they meet in May.
“The Fed has finally made it official – no surprises there,” said Mike Loewengart, managing director of investment strategy at Morgan Stanley’s E*Trade. “That said, the Fed’s rate hike signifies a vote of confidence that the economy is in good enough shape to withstand tighter policies.”
For Scott Minerd, chief investment officer of Guggenheim Partners, the Fed is in an “inflationary panic” as it begins to tighten monetary policy in response to inflation. The central bank has paid too much attention to financial markets at the expense of its job of controlling the money supply and managing its balance sheet, he said in an interview on Bloomberg Television.
“The Fed has largely abandoned monetary orthodoxy,” he added. “He’s trying to be too cute in the way he handles it.”
Traders also followed the latest geopolitical developments. Ukrainian President Volodymyr Zelenskiy gave an emotional speech to the US Congress while President Joe Biden offered hundreds of millions of dollars in new weapons and called Russian President Vladimir Putin a “war criminal”. After talks between Russia and Ukraine, a Kremlin spokesman says a neutral Ukraine with its own army could be a possible compromise in the current crisis, while kyiv says it needs guarantees firm security in any outcome.
Here are some key events to watch this week:
- Bank of England rate decision on Thursday
- ECB President Christine Lagarde, Executive Board Member Isabel Schnabel, Governing Council Member Ignazio Visco and Chief Economist Philip Lane speak at a conference on Thursday
- Bank of Japan rate decision on Friday
Some of the major movements in the markets:
- The S&P 500 rose 2.2% at 4 p.m. PT
- The Nasdaq 100 rose 3.7%
- The Dow Jones Industrial Average rose 1.5%
- The MSCI World index rose 2.9%
- The Bloomberg Dollar Spot Index fell 0.7%
- The euro rose 0.8% to $1.1040
- The British pound rose 0.8% to $1.3146
- The Japanese yen fell 0.3% to 118.63 per dollar
- The yield on 10-year Treasury bills rose three basis points to 2.18%
- The German 10-year rate rose 6 basis points to 0.39%
- The UK 10-year yield rose five basis points to 1.63%
- West Texas Intermediate crude fell 1.4% to $95.08 a barrel
- Gold futures are little changed
–With help from Emily Barrett, Sunil Jagtiani, Robert Brand, Vildana Hajric, Emily Graffeo, Jennifer Bissell-Linsk and Isabelle Lee.