Wall Street staged a massive ‘relief rally’ in the final hour of trading Wednesday after the US Federal Reserve raised its key interest rate by half a percentage point and unveiled plans to shrink its $US9 trillion balance sheet as it steps up the fight to control rising inflation.
Helping send the markets sharply higher were comments by chair Jay Powell that the central bank is not looking at a big rate rise of 0.75% (though half a per cent increase remains on the cards) helped steady sentiment.
In doing the bank and its chair removed a major source of uncertainty for markets and up they went, soaring by more than 3% for the Nasdaq and over 930 points for the Dow.
Oil, gold and other commodities followed shares higher, the US dollar weakened against the weak yen, rose against the euro and fell sharply against the Aussie which charged back over 72 US cents and kept rising to end at 72.54.
Gold rose to $US1,884, a rise of 0.75% and US crude oil futures jumped more than 5% to $US107.63.
US bond yields fell – the 10-year security lost more than 5 points to 2.94% after topping 3% briefly on Tuesday.
ASX 200 futures though had a more sedate 38-point rise pencilled in at 6.45am in Sydney.
At the same time the Reserve Bank of India surprised with its first rate rise since 2018 to try and combat the surge in inflation following higher prices for oil and cooking oils – especially palm oil after Indonesia banned its export at the end of April.
The RBI met in an emergency session and lifted its repo rate 0.4% to 4.4% (from the record low of 4%) and Governor Shaktikanta Das said rising prices of commodities, including crude and edible oils, both of which India imports in large quantities, led policymakers to make the first increase in borrowing costs since 2018.
The Bank of England is expected to lift rates by 0.25% at a meeting tonight, Sydney time.
In Washington the Fed reiterated in its post meeting statement that “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
It pointed to “lockdowns in China are likely to exacerbate supply chain disruptions,” and the invasion of Ukraine “and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity,” the Federal Open Market Committee statement for May said. “The committee is highly attentive to inflation risks.”
The Fed plans to shrink its balance sheet starting in June by allowing securities to mature without reinvestment. It said on Wednesday that it will ultimately let up to $60 billion in Treasury debt expire each month, along with $35 billion in mortgage-backed debt. That plan will have phased in fully as of September.
The Fed’s plan to reduce its holdings is likely to take steam out of financial markets and could help to cool the housing market as it lifts longer-term borrowing costs, reinforcing the effect of the central bank’s interest rate increases. The Fed’s anticipated moves have already begun to push mortgage rates higher.
In Australia in addition to this week’s 0.25% rate rise, the Reserve Bank will allow its holding of bonds to mature and will not reinvest the proceeds, a move that will continue to tighten policy and pressure mortgage lenders to cut their activities.
Powell told a media conference after the statement was issued that the central bank will not easy and said the central bank could consider the need for half a per cent rate rises “at the next couple of meetings”.
Powell said the central bank has a “good chance” to curb inflation without inducing a recession, but noted challenges in that endeavour.
“We don’t have precision surgical tools. We have essentially interest rates, the balance sheet and forward guidance and they’re … famously blunt tools,” Powell told the press conference.
“No one thinks this will be easy. No one thinks it’s straightforward. But there’s certainly a plausible path to this,” he added.
By the close the Dow had leapt 932.27 points, or 2.81%, to close at 34,061.06. The S&P 500 jumped 2.99% to 4,300.17 while the Nasdaq Composite ended 3.19% higher at 12,964.86.
It was the biggest gain since 2020 for both the S&P 500 and the Dow.
Stocks seen as economic indicators also performed well, with Home Depot and Caterpillar rising 3.4% and 4.2%, respectively. Bank stocks also gained ground, with Citigroup climbing 4.3% and JPMorgan Chase rising 3.3%.
Tesla shares jumped 4.7%, Twitter shares edged up 0.39% to $49.06 and still well below the Elon Musk price of $US54.20.
Apple shares were up 4.1%, Alphabet (Google) shares closed 3.7% higher but Amazon shares could only manage a 1.35% gain as investors remained wary of its current problems. Netflix shares rose more than 2%.
The rebound was spread across value and tech sectors, which tells us the sharp rise was more a ‘relief rally’ than a broad-based advance that will carry on for a while.
We have all heard that rising rates hit tech stocks harder than they do industrial and financials, which are regarded as ‘value’ investments. That’s why Nasdaq has sold off more than the Dow and S&P 500 this year.
It will pay to wait and see if Nasdaq continues to rise – the negative feeling about the tech giants especially remains entrenched for the moment.