Stocks get no respite as traders amp up Fed wagers

The stock market got little encouragement to sustain its rebound after the Federal Reserve signaled that interest rates will continue moving higher amid ongoing inflation concerns.

It’s not like the minutes from the latest Fed gathering brought a great deal of new information, but they certainly corroborated the idea that nothing will prevent officials from keeping rates higher for longer should economic resilience pose a threat to their goals. Now one thing to highlight is that while Chair Jerome Powell hasn’t been pushing back against easier financial conditions, Wednesday’s statement indicates they could warrant a “tighter stance.”

That all obviously means the Fed will be in no rush to cut rates.

And that perception continued to be reflected in the swap market. Traders are now almost fully pricing in quarter-point increases at each of the Fed’s next three meetings. The rate on the June overnight index contract rose to 5.323%, almost 75 basis points above the current effective fed funds rate. The market also priced in a higher eventual peak, with the July contract nearly reaching 5.4%.

A number of officials said that an “insufficiently restrictive” policy stance could stall recent progress on moderating inflation pressures, according to the statement, suggesting they are prepared to move rates up further than their December forecast of 5.1%. The minutes also said “almost all” officials agreed it was appropriate to raise interest rates by 25 basis points at the meeting, while “a few” favored or could have supported a bigger 50 basis-point hike.

“Bottom line is that many market head winds aren’t going away and investors should expect volatility to stay as they parse over the impact rates being higher for longer will have,” said Mike Loewengart at Morgan Stanley Global Investment Office.

In the run-up to the Fed’s minutes, a Bloomberg survey of economists showed that inflation that’s proving increasingly stubborn will prompt the central bank to raise rates to an even higher peak level and hold them there through the year. Forecasters boosted their projections for the Fed’s preferred inflation gauge for every quarter through the first half of next year.

Aside from the Fed, traders kept an eye on some corporate highlights.

Apple has a moonshot-style project underway that dates back to the Steve Jobs era: noninvasive and continuous blood glucose monitoring, according to people familiar with the effort. Intel slashed its dividend payment to the lowest level in 16 years.

Traders pinned hopes on the earnings season to push the S&P 500 somewhere out of a trading range it’s been stuck in for months. Between JPMorgan Chase’s results that kicked off the announcement season and Walmart’s report Tuesday, the S&P 500 added 0.4%. This ties for the smallest earnings-season reaction in either direction since 2018, data compiled by Bloomberg show.

“After a strong start to the year driven by absolute and relative short covering by institutional investors, skepticism over the sustainability of the rally remains elevated, and bears are beginning to wrestle control from the bulls,” said Mark Hackett, chief of investment research at Nationwide. “While institutional investors have been net buyers this year, they remain conservatively positioned and quick to sell, while retail investors continue to aggressively buy equities.”

“This is a similar trend to what we saw through the second half of 2022,” he added.

Another thing traders are taking note is the recent flare-up in equity volatility. And the reason is that after a lengthy subdued period, that may put the S&P 500’s rally to the test. The so-called VIX held near its highest level since mid-December.

“There was some huge upside call buying activity on the VIX in February as traders turned bearish on the resilience of the equity market,” said Aurel’s Gurmit Kapoor.

That’s a stark contrast to data at the end of last month that showed very few were betting against the rally. Shares out on loan, an indication of short-selling interest, stood just below 1% of the S&P 500’s median free float as of Jan. 31, according to figures compiled by S&P Global Market Intelligence.

As the Fed’s most-ambitious policy tightening in decades tests investors’ resolve toward equities, U.S. companies are increasingly relying on buybacks to boost their market valuation.

Companies in the S&P 500 bought back at least $936 billion of shares in 2022, compared with the $565 billion they paid out as dividends, according to estimates by Howard Silverblatt at S&P Dow Jones Indices. That’s the highest amount of buybacks since the turn of the millennium.

Geopolitical tensions also simmered on the background.

U.S. President Joe Biden said Russian President Vladimir Putin made a “big mistake” in suspending participation in the New START pact, his first direct response to the announcement. Biden made the brief remark Wednesday in Warsaw, ahead of a meeting with a group of eastern-flank NATO allies known as the Bucharest Nine.

Meantime, Putin said he’s waiting for his Chinese counterpart, Xi Jinping, to visit Russia as he hailed deepening ties with Beijing at talks with China’s top diplomat.