Stocks climb, yields sink as Fed-hike bets recede

The stock rally gained traction, defying calls from skeptics in the aftermath of the Federal Reserve decision, with traders paring bets on rate hikes as the drumbeat of recession grew louder amid an ugly economic print.

Equities climbed to a seven-week high, led by defensive groups, which are often sought after during challenging times.

Tech underperformed before Apple and Amazon.com’s results.

Bond yields sank, and swaps referencing policy meeting dates showed bets the fed funds rate will peak around 3.25% before the end of 2022, less than 100 basis points above its current level.

Investors continued to embrace the idea the Fed could soon reduce the pace of tightening as data signaled the economy is losing momentum heading into the back half of the year.

That was a day after Jerome Powell’s remarks that hikes would slow at some point, which sparked a powerful market reaction that was bashed by Fed watchers saying traders got it all wrong as tighter financial conditions are needed to vanquish inflation.

“Bad news is becoming good news,” said Michael Arone, chief investment strategist at State Street Global Advisors. “When the economy is slowing, inflation measures will likely fall. That will bring the end of the tightening cycle nearer and markets will like that.”

For LPL Financial’s Jeffrey Roach, the Fed will likely interpret the drop in real growth as confirmation to slow down the pace of tightening.

“Front-loading rate hikes eventually mean smaller hikes in the near future,” he added.

FHN Financial’s Chris Low said that based on Powell’s comments Wednesday, officials will not stop hiking just because the economy is shrinking.

“They need to see real progress against inflation before they stop raising rates,” Low noted. “With that in mind, this recession will get deeper before the economy starts to heal.”