Markets react to fed’s rate increase, Powell’s comments

May 04, 2023 (MLN): Wall Street stocks declined along with the dollar after the Federal Reserve's latest interest rate hike on Wednesday, while US oil prices slid below $70 a barrel amid recession worries.

Following an up day on European bourses, US stocks initially rose after the Federal Reserve paired its latest rate increase with a hint that it could pause on additional hikes.

But after veering in and out of positive territory, stocks moved lower in their final shift of the day after Fed Chair Jerome Powell ruled out interest rate cuts in 2023 during a press conference.

All three major indices retreated, with the S&P 500 finishing down 0.7%.

"It feels like the market didn't get everything it wanted but maybe got everything it could expect," said Art Hogan, an analyst at B. Riley Financial, who characterized the decision as a "moderately dovish hike." But Steve Sosnick of Interactive Brokers said the market's pullback reflected that "people have been coming around to the general consensus that this was more hawkish than the dovish.", as APP reported.

The dollar also pulled back against other major currencies, although it pared its losses later in the session following Powell's remarks about interest rate cuts. The attention next shifts to Thursday's European Central Bank meeting.

The ECB is expected to deliver another interest rate increase, but analysts are divided on how big the hike will be against a backdrop of stubborn inflation and market turmoil.

"Both a 25-basis point and a 50-basis point rate hike seem to be on the table," said ING economist Carsten Brzeski, adding there was a growing debate between "hawks" and "doves" about the impacts of tightening.

Given the divide within the ECB, a quarter-point increase would be a "typical European compromise", he added.

Meanwhile, worries about weaker demand due to an economic slowdown sent US benchmark oil contract WTI under $70 per barrel for the first time since OPEC+ cut output a month ago in a bid to bolster prices.

Also weighing on investor sentiment were fears that Democrats and Republicans could fail to reach a deal on raising the US debt ceiling, triggering a default by the world's largest economy as early as June 1.

Stephen Innes of SPI Asset Management said that even if a crisis were averted, it may create a drag on markets. "As we have seen in the past, a resolution to the debt limit is likely to occur," he noted.

"The problem for risk markets is a negotiated deal may include a pullback in government spending that could negatively impact US growth."

Regional US banking shares, which have been under pressure following recent bank failures, ended the day lower, reversing earlier gains. PacWest Bancorp lost 2%, KeyCorp declined nearly 2%, and Zions Bancorporation fell 5.3%.

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