Nasdaq, S&P, Dow in the red as Fed projections point to further rate hikes
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U.S. stocks on Wednesday moved lower, after the Federal Reserve held interest rates steady as widely expected, but raised its projection for the year-end peak rate. Focus now turns to chair Jerome Powell's upcoming press conference.
Wall Street's major averages had traded near the flatline through the day ahead of the rate decision, as investors refrained from making big moves. Market participants also received further economic data that showed a cooling in producer inflation.
The tech-heavy Nasdaq Composite (COMP.IND) had reversed course and was now down 0.43% to 13,514.59 points in late afternoon trade, while the benchmark S&P 500 (SP500) had also slipped into negative territory and was now lower by 0.31% to 4,355.26 points. The Dow (DJI) extended its losses, retreating 0.79% to 33,940.55 points.
Treasury yields had earlier fallen after the inflation data and amid the anticipation of no rate hike. They were moving higher after the decision. The longer-end 10-year yield (US10Y) was flat at 3.84% while the 2-year yield (US2Y) - which is more rate-sensitive to the Fed's moves - was now up 7 basis points to 4.77%. Meanwhile, the dollar index (DXY) was lower by 0.15% to 103.18.
Of the 11 S&P sectors, ten had now slipped into the red.
As anticipated, the Fed held interest rates steady after 10 consecutive hikes, in the wake of data since the last meeting that has continued to point to a cooling in the economy and the highly resilient labor market.
"The most important part of the statement: It's not quite a promise, just a very pregnant hint that the Fed anticipates raising rates at the next meeting," economist Justin Wolfers tweeted.
The Fed also published its Summary of Economic Projections (SEP), which showed that policymakers now expect the benchmark rate to top out at 5.6% at the end of this year, significantly higher than the projected 5.1% in the March SEP.
Higher GDP expectations from the Fed dot plot "means no rate cuts this year," SaxoBank fixed income strategist Althea Spinozzi tweeted. "Inflation remains a threat. Therefore, the Fed cannot afford yields to drop. Actually, it needs long-term yields to continue to soar in order to tighten the economy further. Active selling under the QT will be key for that."
The major U.S. averages had posted gains in the last two sessions in the runup to the Fed's meeting, with the benchmark S&P (SP500) hitting fresh 52-week closing highs. Sentiment yesterday was helped by a moderation in consumer inflation in May.
On Wednesday, the producer price index (PPI) report for May came in, with the headline number falling more than expected on a M/M basis and trailing the consensus on a Y/Y basis.
"The core (PPI) rate dipped to 2.8% in May from 3.2% in April and 8.6% in May last year, so the downward trend in the headline is not just a story of falling food and energy prices," Pantheon Macro's Ian Shepherdson said.
"The pace of margin compression is uneven and the past couple months have been disappointing, but the big picture is intact: Slowing demand growth for goods, coupled with the dramatic turnaround in supply chains, means that gross margins cannot be sustained at their pandemic-boosted level. Margin re-compression over the next year will exert intense downward pressure on core PCE inflation and the GDP deflator, as well as the PPI," Shepherdson added.
Turning to active stocks, UnitedHealth (UNH) slipped more than 7% and weighed on other managed care providers after the company warned that its medical care ratio - a key metric for health insurers - would come under pressure in Q2.