Stocks Roiled by Fed Day’s Nerve-Wracking Rhetoric: Markets Wrap

(Bloomberg) -- Wall Street traders bracing for the usually unnerving Federal Reserve decision got a double dose of stress on Wednesday, with Treasury Secretary Janet Yellen’s remarks rattling bank shares and Jerome Powell dashing hopes on rates this year.

Her testimony to lawmakers that the government isn’t considering providing “blanket” deposit insurance to stabilize the banking system sent financial shares into a tailspin that weighed on broader stock indexes. The market also gave up gains as Powell said he’s prepared to keep tightening until inflation shows signs of cooling. Equities initially rose as the Fed delivered the expected 25 basis-point hike and kept its year-end rate projection intact.

“Fed Chair Powell started the press conference by noting that the banking system is sound, but Treasury Secretary Yellen put a wrench in that idea,” said Edward Moya, senior market analyst at Oanda. “Yellen’s comment on deposit insurance unnerved investors as the banking turmoil will not be going away anytime soon.”

In a broad-based selloff, the S&P 500 erased a rally that approached 1% and finished the day with a 1.7% slide. All 22 stocks in the KBW Bank Index retreated, with the measure of US financial heavyweights down almost 5%. Treasury two-year yields plunged 23 basis points to 3.94%. A dollar gauge retreated for a fifth straight day — its longest losing streak since April 2021.

The swap market shows a bit more than a one-in-two chance that officials will add another 25 basis points to their benchmark in May. Expectations for cuts deepened, though, with the market suggesting that the effective fed funds rate will drop to around 4.18% in December. That’s below what was expected in earlier trading before the decision.

“I would not expect the market to take these rate cuts out in the near term and could very well price in more cuts if the data deteriorates from here,” Matthew Hornbach, global head of macro strategy at Morgan Stanley told Bloomberg Television.

Powell himself, though, said in response to questioning that officials “just don’t” see rate cuts this year and that they will raise rates higher than expected if that is needed. 

“Rate cuts are not in our base case,” he said.

Key events this week:

• Eurozone consumer confidence, Thursday
• BOE interest rate decision, Thursday
• Swiss National Bank rate decision and press conference, Thursday
• US new home sales, initial jobless claims, Thursday
• US Treasury Secretary Janet Yellen testifies to a House Appropriations subcommittee, Thursday
• Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
• US durable goods, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.7% as of 4 p.m. New York time
• The Nasdaq 100 fell 1.4%
• The Dow Jones Industrial Average fell 1.6%
• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.6%
• The euro rose 0.9% to $1.0863
• The British pound rose 0.5% to $1.2274
• The Japanese yen rose 1% to 131.21 per dollar

Cryptocurrencies

• Bitcoin fell 4.7% to $26,840.87
• Ether fell 4.3% to $1,724.27

Bonds

• The yield on 10-year Treasuries declined 17 basis points to 3.44%
• Germany’s 10-year yield advanced four basis points to 2.33%
• Britain’s 10-year yield advanced eight basis points to 3.45%

Commodities

• West Texas Intermediate crude rose 0.5% to $70.01 a barrel
• Gold futures rose 1.7% to $1,991.50 an ounce

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