Wall Street Breakfast: Bulls Like Hawks

Wall Street Breakfast: The Conflict Goes Hypersonic

Bulls like hawks

The Federal Reserve kicked off its tightening cycle with an expected quarter-point hike and the stock and bond markets had different reactions. The FOMC raised rates by a quarter point. It was expected, but the summary of economic projections took what many saw as a hawkish tilt, with the median rate forecast at the end of 2022 at 1.9%, down from 0.9% in December, and the majority of policymakers the Fed is looking for seven hikes this year. Officials see rates at 2.8% at the end of 2023, down from 1.6% at the previous Fed meeting.

Thread the needle: Stocks sold off just after the release of the statement and dot chart, along with the S&P 500 (SP500) (NYSEARCA: SPY) plunging into negative territory. But they quickly resumed rally mode as Fed Chairman Jay Powell spoke, seemingly taking heart from downplaying the possibility of a recession.

“Asset markets treated the FOMC statement and projections as clearly hawkish when released, but reacted more positively as the press conference progressed,” Standard Chartered strategist Steve Englander wrote. . “Powell’s mention that the balance sheet reduction might be worth an additional hike and comments about easing property price inflation (even minimal) may have eased market fears a bit. We think the Fed is probably happy with that reaction,” he said. . “Stock markets closed higher, suggesting investors saw the Fed’s stance as a common thread between inflation tolerance and the threat of a major downturn.”

At the close, the S&P ended up more than 2%, with the Nasdaq (COMP.IND.) (NASDAQ: QQQ) up more than 3% and the Dow (DJI) (NYSEARCA: DIA) more than 1.5% higher. Stock index futures are down slightly this morning. The S&P 500 is now up 4.4% in the past two sessions.

“Don’t ignore outbursts of strength like this,” said Ryan Detrick, LPL’s financial strategist.

“Here are a few other recent times when stocks have gained this much: March and April 2009, August 2011, October and November 2011, December 2014, August 2015, December 2018, March and April 2020,” he tweeted. “Now was not the time to be too bearish going forward.”

Notably, stocks are emerging from a correction in the broader market and a bear market among growth names. But it looks like a vote of confidence from the stock market that, after admitting it is behind the curve, the Fed won’t overreact or brake too hard. While Powell definitely delivered a hawkish message, the U.S. economy appears less vulnerable to shocks and a possible recession than other global economies, Goldman Sachs economist Steffan Ball told Bloomberg.

Problems with the curve: The Treasury market does not seem too convinced that a soft landing is on the cards. Bonds followed a similar trajectory to stocks yesterday afternoon, with prices plunging and yields rising on the release of the statement, particularly in the short term, then changing direction as Powell spoke. Following the press conference, the 2-year yield (NASDAQ: shy) increased by 5 basis points, while the 10-year rate (NYSEARCA:TBT) (NASDAQ: TLT) was weaker. Yet this has further flattened the yield curve and an inverted 2s-10s curve is generally seen as a warning of an impending recession. The curve continues to flatten today, with the 2-year down 2 basis points at 1.95% and the 10-year down 3 basis points at 2.15%, bringing the gap to 20. basis points.

That’s “a remarkably flat curve for the very beginning of the rate hike cycle,” the ING economists said. “The 2-year entered the meeting at a fairly aggressive discount to the funds rate anyway, reminiscent of the rate hike cycles that were typical before the Great Financial Crisis, when 50 basis point hikes never were not unusual,” ING added.

On average, “it takes about three years from the first Fed hike to a recession,” said Deutsche Bank’s Jim Reid. “However, the bad news is that all but one recession in 37 months (essentially three years) occurred when the 2s10 curve reversed before the end of the hiking cycle. With all recessions starting later, none of them had an inverted curve at the end of the hike cycle,” he added. “In fact, hike cycles that ended with the curve still in positive territory saw the next recession to hit 53 months on average after the first rate hike, while the next recession for hiking cycles that ended with an inverted curve started on average 23 months from now, so just under two years.” ( 3 comments)

Berkshire at $500,000

The coveted Class A shares of Berkshire Hathaway (NYSE: BRK.A) closed above half a million dollars each for the first time on Wednesday. Shares reached $506,028.97 and closed at $504,036.00, up 1.2% for the day.

The company that owns a diverse collection of businesses ranging from Dairy Queen fast food restaurants to Geico auto insurance to Precision Castparts aerospace components now has a market capitalization of $735.9 billion, less than $100 billion. dollars compared to Tesla. (NASDAQ: TSLA) $843.5 billion. (45 comments)

Layoffs at Alibaba

Alibaba (BABA) and Tencent Holdings (OTCPK:TCEHY) are reportedly set to cut thousands of jobs due to Beijing’s ongoing regulatory crackdown on China’s tech sector.

According to a Reuters report, BABA is planning layoffs that could exceed 15% of the e-commerce giant’s 39,000 employees. TCEHY is also on track to cut between 10% and 15% of its more than 94,000 employees, according to Reuters. (39 comments)

Ukrainian Crypto

Ukraine has taken a leap forward to use the decentralized market after President Volodymyr Zelenskyy signed a bill that legalizes cryptocurrencies in the country.

Specifically, the law determines the legal status, classification, ownership and regulators of virtual assets, in addition to setting registration requirements for virtual asset service providers, the Department of Digital Transformation said. (54 comments)

Robinhood Stock Loan

According to Bloomberg, Robinhood Markets (HOOD) rose 15% after learning that it was set to offer an option for users to lend their shares to other financial institutions. The move would help it compete more directly with conventional brokerages such as Fidelity Investments and E*TRADE of Morgan Stanley (MS) and Charles Schwab (SCHW).

Code describing the service was discovered in a beta version of Robinhood’s iPhone app by developer Steve Moser, who shared the information with Bloomberg. (5 comments)