Stocks Jump on Bets Economy ‘Can Handle’ Fed Hikes: Markets Wrap

(Bloomberg) -- Stocks rallied on speculation that the Federal Reserve will effectively combat surging prices without choking off economic growth.

The S&P 500 closed near its all-time high after initially dropping when the Fed statement came out. The Nasdaq 100 jumped almost 2.5%. Treasury yields rose, with money markets shifting to price in three quarter-point hikes by the end of 2022 as signaled by officials. The new forecasts also showed policy makers see another three rate increases in 2023 and two more in 2024.

“The big question for markets now is: can the U.S. economy digest this pace of hikes without ending up with a stomach ache?,” said Seema Shah, chief strategist at Principal Global Investors. “After the 20 months we’ve had, perhaps six hikes over a two-year period looks overwhelming. But compared to previous hiking cycles -- most pertinently 2004 to 2006 when the Fed made 17 consecutive hikes -- we are tentatively confident that the U.S. economy can handle it. Not only that, but U.S. inflation needs it.”

Read: Fed Quickens Taper, Signals Three 2022 Hikes in Inflation Pivot

The Fed will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

“The economy has been making rapid progress toward maximum employment,” Fed Chair Jerome Powell said.

More comments:

• “The Fed is signaling that it is taking inflation seriously and, so far, the market believes that the Fed will successfully fight inflation,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
• “This could mark a turning point in the business cycle as we’re actually seeing a market cheering the Fed’s vote of confidence in the economy, as opposed to running higher on stimulus,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial.
• “This isn’t the Fed’s first rodeo when it comes to tapering. All else equal, investors should not expect Fed tapering to be a disruptive process for markets,” said Jason Pride, chief investment officer of private wealth at Glenmede.

The five-year breakeven rate on Treasury inflation protected securities -- or the difference between those yields and the ones on typical Treasuries -- approached 2.8%. That suggests the Fed will be challenged to get inflation down toward its 2% target.

Read: Federal Reserve’s Reverse Repo Use Hits Record $1.62 Trillion

Some corporate highlights:

• Chinese firms listed in the U.S. like Alibaba Group Holding Ltd. and Baidu Inc. slid on concerns the U.S. will hit more companies with investment and export sanctions.
• Lowe’s Cos. delivered a revenue outlook that missed analyst estimates and said it expects home-improvement demand to slow next year.
• Eli Lilly & Co. raised its 2021 earnings and revenue forecast and said it expects 2022 sales in a range of $27.8 billion and $28.3 billion, sending shares up the most since June.

Investors also monitored the latest developments on the omicron coronavirus variant. Anthony Fauci, who serves as a medical adviser to President Joe Biden, said on a briefing Wednesday that studies so far show strong antibody responses from existing boosters, though protections against omicron are weaker with just two doses. The strain could make up about 13% of Covid-19 cases in New York and New Jersey, projections from the Centers for Disease Control and Prevention show.

Here are some key events this week:

• BOE rate decision, Thursday.
• ECB rate decision, Thursday.
• U.S. housing starts, initial jobless claims, industrial production, Thursday.
• BOJ monetary policy decision, Friday.
• S&P Dow Jones Indices quarterly rebalance effective after markets close, Friday.
• “Quadruple witching” day in the U.S. market, when options and futures on indexes and equities expire, Friday.

For more market analysis, read our MLIV blog.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.6% as of 4 p.m. New York time
• The Nasdaq 100 rose 2.4%
• The Dow Jones Industrial Average rose 1.1%
• The MSCI World index rose 1.1%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%
• The euro rose 0.3% to $1.1294
• The British pound rose 0.3% to $1.3265
• The Japanese yen fell 0.3% to 114.05 per dollar

Bonds

• The yield on 10-year Treasuries advanced two basis points to 1.46%
• Germany’s 10-year yield was little changed at -0.36%
• Britain’s 10-year yield advanced one basis point to 0.74%

Commodities

• West Texas Intermediate crude rose 1.2% to $71.58 a barrel
• Gold futures rose 0.4% to $1,779.30 an ounce

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