Article published at 9:45 a.m. CT
JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Investors took a breather and are back today
- Intel and Apple share on the upside after pact
- A new Federal Reserve is in the making
The markets were moving to the upside after it looked like buyers took a day off during yesterday’s trading, coupled with the volatility that typically accompanies triple witching and the immediate selloff after the Federal Reserve’s signal that interest rates could head higher later this year.
But as what happens often in these cases, investors take a breath and realize it might not be as bad as everyone originally thought. All three indices were in positive territory early on and if they continue that upward momentum throughout the day, they will mark the third straight week of gains in a shortened week.
Yesterday’s collapse gained momentum after the Federal Reserve kept interest rates steady but signaled they could rise this year. There’s more on that below, but the stocks that took the heaviest blows, particularly in the tech sector, are mostly rebounding today.
The U.S. and Iran inked the memorandum of understanding that’s been on the table all week, offering hope that the upcoming 60-day negotiations will finally put an end to the conflict. There are promises that the Strait of Hormuz will open toll-free, allowing oil container traffic to resume.
WTI crude continued to slide on the news, falling better than 2% to slightly below $75 a barrel. This is good news when looking at the movement since the Iran conflict began: Prices have fallen 20% in the last couple weeks and are down 36% since reaching $117 a barrel high. They’re not quite at the pre-conflict range of $67 a barrel, but they’re coming off at a very measured pace.
The Nasdaq Composite looks to be regaining most of its losses yesterday as tech stocks moved to the upside. Intel shares jumped better than 13% early on after the president posted on social media that Apple agreed to partner with the government-backed Intel to make chips stateside.
Apple shares initially slipped, pushed mostly by a Wall Street Journal report that Chief Executive Tim Cook said the firm plans to up prices on most of its products to offset the surging costs of memory and storage chips. But they’re back in the green after investors digested that news.
Here Comes the New Fed
Welcome to the new Federal Reserve world according to Kevin Warsh. For those who missed it yesterday, the Federal Open Meeting Committee unanimously left rates unchanged at 3.5% to 3.75%, as expected, but in what could only be considered a barebones statement that failed to offer any shred of forward guidance. Those were the first most obvious changes that Warsh was behind.
Though the rates stayed steady for the fourth straight time, the so-called “dot plot” in which members give their assessments of what might be ahead, turned decidedly hawkish with nine of the 18 members penciling in a rate hike this year, and a least one thinking there might be two. Warsh, who would be considered the 19th member, did not offer an assessment, noting he would like to see the dot plot dropped.
Not surprisingly a potential rate hike spooked the markets, which sold off sharply and rapidly. The Dow Jones Industrial Average, which had touched another record peak in intraday trading, gave up 507 points, or nearly 1%, at the close. The S&P 500 slumped 1.2% to settle near session lows while the tech-weighted Nasdaq Composite took the biggest beating, falling 1.34%. Even SpaceX took a tumble, its first in the four days it’s been trading, losing near 5% to close at $191.82.
In the press conference after the rate decision was released, Warsh lamented that the Fed has missed its 2% inflation mandate for more than five years and committed to get back on track to attaining it. He repeated a number of times that the Fed will “deliver on price stability,” stressing that the entire 19-member committee delivered an “unambiguous and unanimous” vote to do so.
“We recognize that inflation has been running well ahead of the Fed’s long-stated inflation goal,” Warsh told reporters. “Persistently high prices are a burden for the American people. But the recent past need not be prologue.”
He made clear he was steering the Fed down a new path toward price stability policy by potentially getting rid of “old-fashioned survey methods” — they don’t always reflect on-the-ground economic situations — to bring in more real-time and revamping messaging. That’s a substantial shift from the inner workings of the Fed in many years, and will require finding new metrics inside of and outside of the federal government. He has a committee for that, and for at least four other objectives on his Fed overhaul.
Among his top priorities is reforming how the Fed communicates, wanting to jettison any hints at forward guidance, which he thinks boxes members in and compels the markets to respond to the guidance rather than the economic forces at hand. “Financial markets perform best when they react to incoming data,” he said, noting that there was “less efficiency when they ask how will the Fed react.”
Warsh is taking a page out of the Greenspan era (1987-2006) — or directly mimicking him — which should not be surprising considering his recent comments during his confirmation hearing last month about how he intended to “fill the role of chairman with energy and purpose, just the way Chairman Greenspan did." Greenspan, you might remember, was famous for what he called “purposeful obfuscation,” that was often referred to as “Fed speak.” In other words, don’t let the world know what you or the committee is thinking, react instead to what is actually happening.
Have a great trading day and happy Father’s Day!
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