US stocks jump on bets economy ‘can handle’ Fed hikes

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

US stocks, FED, inflation, rates, risk, U.S. economy
The new forecasts also showed policy makers see another three rate increases in 2023 and two more in 2024.

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

The S&P 500 extended gains after initially dropping when the Fed statement came out. The Nasdaq 100 jumped about 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.”

The Fed will also 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.

“Economic activity is on track to expand at a robust pace this year,” Fed Chair Jerome Powell said, adding that “the economy has been making rapid progress toward maximum employment.”

“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.

“While the three rate hikes for ’22 projected by the dot plot likely raised more than a few eyebrows, keep in mind that would still keep us within the realm of historically low rates. The market often moves positively when it has a clearer picture of the future, which the Fed no doubt provided,” 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.

A key gauge in the bond market that measures the gap between yields on inflation-adjusted Treasuries and those on regular securities suggests the Fed will be challenged to get inflation down toward its 2% target. The five-year breakeven rate — which hit a record high last month — is currently around 2.7%.

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 $1.1288
The British pound rose 0.2% to $1.3261
The Japanese yen fell 0.3% to 114.04 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 $71.56 a barrel
Gold futures rose 0.4% to $1,778.70 an ounce

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