Stocks Tumble As Fed Signals Another Rate Hike

U.S. stocks sank in afternoon trading Wednesday after the Federal Reserve voted to hold interest rates steady and signaled it could raise rates one more time this year.

The Dow Jones Industrial Average, up most of the day, fell 0.2%, while the S&P 500 slumped 1%. The Nasdaq sank 1.5%.

Policymakers were widely expected to hold rates steady in response to cooling in the labor market, which is expected to help ease inflation. But the Fed has signaled it's leaving its options open for the rest of the year, and policymakers' economic projections suggested markets are in store for one more hike this year.

The IPO parade started by Arm (ARM) last week continued today with marketing software firm Klaviyo debuting on the New York Stock Exchange. Shares, trading under the symbol “KVYO,” opened at $35.31 Wednesday afternoon, 18% higher than their $30 IPO price, before sinking to close at $30.10.

Stocks dipped yesterday and some Treasury yields rose to their highest since 2007 as investors considered the possibility of the Fed sticking to their “higher for longer” messaging today.

Dow Drops on Fed Rate Hike Fears

After rising as much as 200 points this morning, the Dow Jones Industrial Average dropped in afternoon trading to close down 0.2%, or 76 points, following remarks by Fed Chair Jerome Powell that indicated another interest rate hike is on the table this year, and that rates could remain at their peak well into 2024.

Amgen (AMGN) was the top performer in the Dow 30, gaining 2.7%, while UnitedHealth Group (UNH) rose 2.4%.

IBM (IBM) shares jumped 2.3% to trade just under $150 after RBC Capital Markets initiated coverage on the stock, giving it an outperform rating and setting a price target of $188.

Walt Disney Co. (DIS) shares gained 0.8%, rebounding slightly from losses yesterday when the entertainment giant said it would invest $60 billion in its parks and cruises over the next decade.

Intel (INTC) shares fell more than 4.5%, continuing to slide after CFO David Zinsner yesterday gave a cautious forecast of data center chip demand while speaking at an analysts’ conference.

Microsoft (MSFT) fell 2.4% after internal documents detailing the company’s plans for its Xbox and gaming unit were accidentally leaked yesterday.

Shares of Apple (AAPL) dropped 2% after a UBS analyst issued a gloomy report on iPhone 15 sales, suggesting that demand for the Pro model is softer than last year’s release. Earlier reports had indicated sales were strong.

Boeing shares fell 1% despite raising its long-term forecast for sales in China, forecasting that the growing travel needs there will require 8,000 new commercial jets by 2042.

Fed Chair Powell Comments on FOMC Decision

“Economic activity has been stronger than we expected—stronger than I think everyone expected,” Federal Reserve Chair Jerome Powell told reporters Wednesday after the Federal Reserve voted to hold rates steady.

That came after policymakers’ economic projections suggested the Fed could raise interest rates one more time this year and hold them there for longer than expected.

Powell praised the progress that the Fed has made in bringing inflation down from 40-year highs last year and said the committee would continue to consider jobs and inflation data to determine the course of policy.

The labor market has been of particular concern lately, as Fed officials see wage growth as one of the larger risks to taming inflation. But, again, progress has been made.

“The labor market remains tight, but supply and demand conditions continue to come into better balance,” Powell said.

According to the Fed’s dot plot, the median Fed official sees rates rising one more time this year to a range of 5.5% to 5.75%.

“We're prepared to raise rates further, if appropriate,” said Powell, “and we intend to hold policy at a restrictive level until we're confident that inflation is moving down sustainably toward our objective.”

Stocks and Bonds Swing on Fed Dot Plot, Powell Comments

Stock indexes fell off a cliff and Treasury yields soared the minute the Federal Reserve’s interest rate decision was made public at 2 p.m. ET.

The Dow dropped more than 100 points, or 0.3%, between 1:59 p.m. and 2:01 p.m. Wednesday. The S&P 500 and Nasdaq experienced similar declines.

Markets were initially jolted by policymakers’ economic projections, especially their forecasts for interest rates next year. In June, the median projection for the federal funds rate at the end of 2024 was 4.6%. Now, the median projection is 5.1%, barely lower than the current rate of 5.33%. That implies the central bank will hold rates higher for longer than it expected just a few months ago.

All three indexes recovered slightly from their sharp drops before jumping at 2:30 p.m.—the minute Fed Chair Jerome Powell began his scheduled press conference—as abruptly as they’d fallen a half hour before.

Fed Holds Rates Steady, But Signals One More Hike

The Federal Open Market Committee (FOMC) decided to leave interest rates unchanged, at least for now.

Investors were nearly certain the Fed would pause its interest rate hikes this month, after raising the federal funds rate 25 basis points to a range of 5.25%-5.5% in July.

However, economic projections from the committee members suggest the Fed has one more hike in store for markets. The Fed dot plot—a graphic representation of what policymakers expect interest rates to be in the future—indicated that 12 of the 19 FOMC members and Fed Bank presidents see rates rising another 25 basis points later this year.

General Mills Posts Lower Profit as Sales Volumes Decline

Shares of General Mills (GIS) were unchanged after the breakfast food giant said its profit fell as it lost market share, especially in North America.

The maker of Cheerios, Cocoa Puffs, and Blue Buffalo pet food reported fiscal 2024 first-quarter earnings per share (EPS) of $1.09, down 1% in constant currency from a year ago although above analysts’ estimates. Revenue rose 4% to $4.9 billion, also above forecasts.

Sales volume overall dropped 2 percentage points, with its North American Retail, Pet, and International segments each slipping 5 percentage points. Sales volume was up 7 percentage points at its North American Food Service unit.

Shares of General Mills hit their lowest level since March 2022 earlier this month, and are down more than 20% so far this year. In midday trading Wednesday, shares were off about 0.5%.

BofA Boosts Its 2023 Year-End Target for the S&P 500, Pointing to AI Benefits

Bank of America raised its outlook for the S&P 500 this year, indicating that the change is partially because of the benefits from artificial intelligence (AI).

BofA now predicts the index will finish 2023 at 4,600, up from its previous estimate of 4,300, noting that all its key indicators are posting bullish signs.

BofA said its highest-conviction call was the equal-weighted S&P 500 (SPW) versus the cap-weighted S&P 500 (SPX). It argued the SPW has “superior earnings visibility, lower valuations, less duration risk, and is even more unloved than equities overall.”

Eli Lilly Sues Businesses Over Alleged Sales of Fake Mounjaro Diabetes Drugs

Eli Lilly & Co. (LLY) sued 10 medical spas, wellness centers, and compounding pharmacies across the U.S. for allegedly selling products that fraudulently claimed to be its popular diabetes drug, Mounjaro.5

With supply unable to meet demand, there is a Mounjaro shortage in the market, though Eli Lilly is taking measures to increase supply.

Earlier this year, Novo Nordisk (NVO) also filed similar lawsuits, accusing spas and medical clinics of selling Ozempic and Wegovy, its in-demand weight loss drugs that are also in short supply.7

Eli Lilly shares were down about 0.7% midday Wednesday, but are more than 55% higher year-to-date.

U.S. Crude Stock Falls to Second-Lowest Level in Nearly 40 Years

America's stock of crude oil fell 0.2% last week to fewer than 770 million barrels, its second-lowest level since 1985, according to the Energy Information Administration's Weekly Petroleum Status Report. In the last 38 years, the only week in which the U.S. has had less oil on hand was two weeks ago when the national stock stood at 767 million.

The U.S. has possessed ample crude oil for decades. Throughout the 2010s, the country’s crude oil stock averaged more than 1.08 million barrels. But reserves have dwindled amid a widespread ban on imports of Russian oil.

Crude stock stood at around 1 billion barrels immediately prior to Russia’s invasion of Ukraine in February 2022. By the last week of the year, it had fallen more than 20% to 793 million barrels.

Limited supply could hamper the government's ability to rein in rising oil and gas prices, which have caused inflation to reaccelerate in recent weeks.

Dollar General at 4-Year Lows Amid Consumer Concerns

Shares of Dollar General Corp. (D G), America’s largest retailer by store count, were down more than 2% Wednesday morning after JPMorgan downgraded the stock to underweight from neutral. Trading around $112, shares were at their lowest point since March 2019.

JPMorgan analysts are concerned about the financial health of Dollar General’s core low-income customer base. While consumer spending has remained strong, even among low-income consumers, analysts see pain ahead for low- and middle-income customers as student loan payments resume and rising gas prices reaccelerate inflation.

Dollar General is also dealing with a PR problem. A Bloomberg News report Wednesday asked whether it’s “the worst retail job in America.”9 The dollar store has come under fire from federal regulators for its hazardous work environment. OSHA has threatened to fine the company more than $12 million this year for exposing employees to unsafe equipment in pest-infested stores with blocked fire escapes.

After weathering last year's bear market with relative ease, Dollar General's stock has fallen more than 50% year-to-date, making it the S&P 500's second-worst-performing stock this year.

Ford Strikes Deal With Canadian Auto Workers Union, Averting Strike in Canada

Ford (F) and Canadian labor union Unifor reached a tentative deal just hours before a deadline that helped avert strike action in Canada, while striking workers in the U.S. warned of further action if an agreement is not reached by Friday.

The three-year contract, which will cover 5,600 workers, is subject to ratification by Unifor members before the deal's details will be released, Ford said in a statement.10

Shares of Ford were up more than 0.5% early Wednesday, and are up more than 8% year-to-date.

-Fatima Attarwala

Stocks Making the Biggest Moves Premarket

Gains:

Coty Inc. (COTY): Shares of the cosmetics company rose 6% after it raised its full-year sales outlook, citing “strong momentum in beauty demand across its key markets and categories, particularly in prestige fragrances.”11 Coty’s luxury fragrance brands include Burberry, Gucci, and Tiffany & Co.
Pinterest Inc. (PINS): Shares of the social network gained 4% after management said at its first investor day that it expects to accelerate revenue growth this year and is aiming for a compound annual growth rate in the mid-to-high teens over the next three to five years.
Ford Motor Co. (F): Shares were up 0.4% after the automaker averted another strike after reaching a tentative deal with Canadian union Unifor.

Losses:

Sunnova Energy International Inc. (NOVA): Shares of the solar services provider fell 6% after it said it plans to sell $400 million in green bonds in a private placement.
Maplebear Inc. (CART): The grocery delivery service known as Instacart dropped 5% after closing up 12% on its first day of trading yesterday. Fellow trading newbie, Arm Holdings Plc (ARM), also surged on its first day of trading before slipping back to around its IPO price.
Dollar General Corp. (DG): Shares of the discount retailer fell about 2% after JPMorgan analysts downgraded the stock to underweight from neutral.

5 Things to Know Before Markets Open

Here's what investors need to know to start their day:

The Federal Reserve is expected to keep its target interest rate range steady at 5.25% to 5.5% when the decision is released at 2 p.m. ET.
Shares of Ford (F) ticked 0.4% higher in pre-market trading after it reached a tentative deal with Canadian auto workers union Unifor that averts a strike of 5,600 workers at the company’s facilities in Canada.10
Goldman Sachs (GS) is reportedly in discussions to sell its specialty lending firm GreenSky to a group of investment firms, as the investment bank shrinks its consumer lending footprint.
Marketing software firm Klaviyo priced its IPO at $30 a share, giving the company a valuation of about $9.2 billion, and will begin trading today on the New York Stock Exchange.12
Boeing (BA) increased its projections for long-term sales in China, as the aircraft maker predicted that the country will need to double its amount of commercial aircraft over the next 20 years as the travel sector there grows.13

Stock Futures Up Ahead of Fed Rate Decision

Futures contracts connected to the Dow Jones Industrial Average were 0.3% higher in premarket trading.

S&P 500 futures were up 0.2%.

Nasdaq 100 contracts gained slightly less than 0.2%.

Originally published on Investopedia.com