The Fed had expected to lower interest rates by now, but according to Chairman Powell, inflation is sticking around longer than expected and therefore higher rates will stick around longer, too.

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So far the market has taken the news in stride. On Wednesday the S&P 500 closed at 5,018, down 17 points, the Dow closed at 37,903, up 87 points, and the Nasdaq Composite closed at 15,605, down 52 points.

Chart: The New York Times

Most actives were led by Pfizer (PFE), up 6.1%, followed by Amazon (AMZN), up 2.2%, and Telsa (TSLA), down 1.8%.

Chart: The New York Times

In morning futures trading, S&P 500 market futures are up 30 points, Dow market futures are up 145 points and Nasdaq 100 market futures are up 131 points.

TalkMarkets contributor Mark Vickery notes Markets Sink After Powell Presser; Big Earnings Post-Bell. 

"Markets surged today on Fed Chair Jerome Powell’s press conference. It came after the Fed’s press release kept interest rates at the same 5.25-5.50%, with the same commitments to a +2% inflation target...

By the time Powell had taken the podium, the S&P 500 was on a straight trajectory up 60 basis points (bps) or so. Toward the end of his Q&A session, markets ticked down a tad, and took the ramp off those session highs before falling all the way back down...

Powell also made an interesting point about inflation. While he noted Q4 2023 GDP had gotten up to +3.4% and the first read of Q1 GDP was only +1.6%, he said taking a look at Private Domestic Purchases (PDP) — which is defined as “total demand less government purchases and exports” — shows a much less drastic pullback: +3.1%. That’s a 30 bps downshift month over month, and purposeful for Powell in discussing that inflation is still notably too high to start cutting rates..."

Vickery also suggests some stock picks in the second half of his column.

Contributor  Michael J. Kramer notes Implied Volatility Crush Sends Stocks Higher As Usual During The Fed Announcement.

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"The Fed meetings seem to create more confusion than needed, but it is what is what it is. I know that even though I wrote yesterday that at 2:35 PM ET, it was possible that we saw the usual FOMC press conference volatility crush, and that it could send stocks higher, I still get messages and questions about why the market rallied and how the market is taking Powell has “dovish” blah, blah, blah.

Amazingly, the volatility crush started on time, and the S&P 500 rallied as expected. So it wasn’t that the market thought Powell was dovish; it was just that implied volatility melted. Once the volatility crush was over, the sellers came back in and took all of the gains away...

The key takeaway today seems to be that the Fed has no idea when it will be able to cut rates. Powell seems hopeful the policy will be tight enough to bring inflation back to target. If the market helps him and tightens financial conditions, it may be. If the market doesn’t tighten financial conditions, then policy probably isn’t tight enough.

Today’s ISM prices paid index didn’t suggest that goods inflation is easing. It rose to 60.9, much higher than the estimates for 55.4. It wasn’t a surprise, and it probably suggests an uptick in m/m CPI for April.

At least at this point, the market doesn’t see the first rate cut until December, and at some point, all the sell-side analysts still looking for the cut in July or September will pivot to a later date for the rate cut."

Contributor Don Kaufman finds Fed Day Is Over…But The Fallout Isn’t.

"The markets rallied strongly after the Fed non-announcement today (an 80-handle move at one point)... only to fall right out of bed in the last 30 minutes or so of trading. We saw a really dramatic, volatile reversal. Volatility futures actually fell as Powell was talking but then picked back up again later in the session.

On the other hand, there was no real reason for markets to rally after Powell’s non-statement in the first place - the reaction was pure conjecture. So we’re going to start tonight’s video in a weird spot - the SPX. Understanding what’s going on there is going to be instrumental for dealing with risk for the rest of the week."

Contributors  James Knightley, Padhraic Garvey, CFA and Chris Turner report that Fed Holds Policy Steady: Rate Hikes Remain “Unlikely” Despite Lack Of Inflation Progress. 

"As universally expected, the Federal Reserve has left the Fed funds target rate range at 5.25-5.50%. The decision was unanimous and was made pretty easy given inflation continues to run too hot for comfort, consumers are still spending strongly and the economy added more than 800,000 jobs in the first three months of the year.

In the accompanying statement they continue to acknowledge that “inflation has eased over the past year but remains elevated”, but they have added the caveat that “in recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective”. This is similar wording that Chair Powell used on 16 April and isn’t an especially surprising addition to the statement. There is also a subtle change further on whereby risks to achieving their employment and inflation goals “have moved toward better balance over the past year”. Previously they suggested the risks were “moving into better balance”. The fact that they didn’t change this more given three consecutive 0.4% month-on-month core CPI prints is mildly dovish it could be argued...

The interesting aspect of the FOMC outcome directed especially to bonds is the slash in the monthly roll-off of Treasuries from $60bn per month to $25bn. That represents a material $35bn of potential reinvestment back out the curve on the theory that the $60bn roll-off could have been maintained. By implication, any such re-investment would be done in a maturity weighted manner. In other words the sizes of reinvestment would be done in a manner that reflects outstanding issuance by maturity. We assume this is the case unless the Fed were to say something different. This is a net positive for bonds, and net neutral for the curve, albeit marginally in favour of the long end.

With respect to the MBS roll-off, there is no change in the official roll-off target (still $35bn). However, over the past year this has actually been running at around $16.5bn per month. The slower roll-off reflects slower underlying mortgage prepayments. By implication, it would not be inconceivable for the Fed to do in excess of $35bn per month should pre-payments accelerate in the future; for example when the Fed starts to cut rates (encouraging some more prepayment). The Fed has not been clear on how they would deal with a pre-payment spurt, but they have also not ruled out quicker toll-offs on MBS where possible (to help recover lost ground).

Bottom line though, we maintain our view that the decrease in roll-off is quite anticipatory. We continue to identify an excess of liquidity in the system, comfortably in excess of $750bn. The latest data show $500bn going back to the Fed on the reverse repo facility, which is the market posting liquidity back to the Fed. And bank reserves are still some $250bn above the $3tr market above which they are seen as ample. On the lower monthly numbers, the Fed will continue with QT right through 2024 and well into 2025...

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The FX market reaction through the press conference saw the dollar continue to soften. Key remarks weighing on the dollar seemed to be those referring to longer term inflation expectations remaining well-anchored, a hike being "unlikely" and a reiteration of Chair Powell’s view that inflation would slow through the year – although his confidence in that view was lower. Additionally, his answer that weaker JOLTS data showed restrictive policy was working also seemed to knock the dollar lower.

The dollar also took its cue from the 10bp decline in short-dated US yields and the near 1% rally in S&P equity futures.

This now marks the fourth consecutive FOMC press conference where the dollar has ended lower on the day. Yet, earlier the DXY was close to the highs of the year. This serves as a reminder that it will be the data, not Fed communication driving the dollar. Unless inflation slows consistently, or unemployment picks up – let’s see what the April payrolls data delivers – the case for holding the dollar remains reasonably strong."

Contributor New Deal Democrat  reports March JOLTS Report: Declines In Everything, Fortunately Including Layoffs. 

"After almost half a year of general stabilization or very slow deceleration, the JOLTS report for March featured multi-year lows in almost all of its components. 

Job openings (blue in the graph below), a soft statistic that is polluted by imaginary, permanent, and trolling listings, declined -325,000 to a three year low of 8.488 million. Actual hires (red) declined -281,000 to 5.500 million, the lowest level since the pandemic lockdowns. Voluntary quits (gold) declined -198,000 to a more than three year low of 3.329 million. In the below graph, they are all normed to a level of 100 as of just before the pandemic:

As has been the case for a number of months now, hires are below the level they were at just in early 2020 just before the pandemic hit, and this month they were joined by quits as well.

The reason the above situation has not been bad is that layoffs and discharges (blue in the graph below) also made a fifteen-month low, and are still running 20% below the level they were at just before the pandemic, and indeed (not shown), at *any* point before :

The more leading weekly initial jobless claims (red) suggest that layoffs and discharges will remain in this range at least for several more months.

Finally, the quits rate also declined -0.1% to a new 3.5 year low as well. Since, as I have noted for a number of months now, the quits rate (blue in the graph below, right scale) tends to lead average hourly earnings (red) [and here’s the long-term view]:

...Needless to say, if a further deceleration in wage growth coincides with an upturn in inflation, that is going to put a dent in real consumer income and spending. So, I will pay even more attention to those two numbers on Friday and later in the month. It also highlights the continuing importance of very low initial jobless claims."

If you want a technical look at current market reactions contributor Peter Mathers has a 20 minute video reviewing Elliott Wave Analysis: SP 500 And Nasdaq 100 Bearish And Bullish Outlooks.

"Elliott Wave Analysis Indices: SP 500 and Nasdaq 100 Wave (4). No doubt there is bearish pressure on all current Indices patterns and based on that I look at the bearish Elliott wave pattern to lower ground, that said I also look at a slim but possible bullish pattern, that still has a little downside before recovery."

Video Length: 00:20:20

That's a wrap for this Thursday.

Have a good one.

Peace.

More By This Author:

Tuesday Talk: Market Stays Up Awaiting FOMC Meeting
Thoughts For Thursday: Stock Indices Stay Steady Amid Corrections
Thoughts For Thursday: Earnings In Earnest