In some ways this makes more sense than yesterday’s gains.
Representative for the oil industry did not immediately respond to requests for comment. The S&P 500 and Nasdaq Composite are now both in bear markets, down about 23% and 34% from their highs in January of 2022 and November of 2021. The Dow is approaching bear territory, down about 19% from its recent highs. The S&P 500 and Nasdaq are already in bear markets and the Dow dropped below the 30,000 benchmark today, its lowest level in a year. Stocks are reversing course after rallying on the Fed’s historic action to hike rates by three-quarters of a percentage point.
In some ways this makes more sense than yesterday’s gains. The Fed’s aggressive rate hike, the biggest since 1994, does little to resolve the vast uncertainty facing the American economy right now. But market sentiment soured Thursday morning as investors began to question whether the Fed could execute a soft landing and avoid recession, something that Powell said would be difficult to pull off. That’s because big swings in prices of a good or service are typically caused by an imbalance between supply and demand. And when the imbalances cause prices to soar, as has happened to gas and oil prices sinceRussia invaded Ukrainein February, those high prices can help rebalance supply and demand. If prices, which soared 8.6% during the 12 months ending in May, continue to accelerate, then another 75 basis point increase seems all but certain. If inflation pressures finally start to cool, Powell may be able to once again take off his hawk costume and act more like a dove again.
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"These higher rates are the result of a shift in expectations about inflation and the course of monetary policy," said Sam Khater, Freddie Mac’s chief economist. "Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market." The Energy Department sent an invitation to oil industry executives Wednesday night to meet next week to discuss high gas prices, an official familiar with the matter tells CNN. So investors need to keep watching the inflation data. The June consumer price index report will be released on July 13…two weeks before the next Fed rate announcement. According to Fed funds futures on the CME, traders are currently pricing in an 85% chance of another 75 basis point rate increase and only 15% odds of a 50 basis point hike. If the Fed again raises rates by 75 basis points, that would bring them to a range of 2.25% to 2.5%.
The shock came after the central bank announced Wednesday afternoon that it would increase interest rates by three-quarters of a percent, the largest hike in 28 years. The oil industry responded to Biden on Wednesday, pushing back on the president’s arguments. Biden said he directed Energy Secretary Jennifer Granholm to hold an emergency meeting on the issue and to engage with the National Petroleum Council, an advisory committee representing the oil-and-gas industry.
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The company’s stock fell slightly today but has been one of the few bright spots for the this year, surging 12%. Kroger, the nation’s largest grocery store chain, said Thursday that budget-constrained shoppers were buying fewer items in stores, favoring Kroger’s cheaper store brands instead of name brands, and switching from beef to pork. As stocks settle after the trading day, levels might still change slightly. "Rising inflation has consumers rethinking their shopping and eating habits," Kroger CEO Rodney McMullen said on a call with analysts. "We are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment." Decades-high inflation ischangingUS consumers’ grocery habits.
- "We are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment."
- Decades-high inflation ischangingUS consumers’ grocery habits.
- So investors need to keep watching the inflation data.
- US markets gave up yesterday’s gains this morning as investors further weighed the Federal Reserve’s messaging around the possibility of imminent recession.
Other economic data lowered market sentiment on Thursday. Housing starts fell by 14% in May, down 3.5% from the year before. The Philadelphia Fed Business Index, which measures changes in business growth, contracted in June for the first time in two years with a reading of negative 3.3. US markets gave up yesterday’s gains this morning as investors further weighed the Federal Reserve’s messaging around the possibility of imminent recession. The 30-year fixed-rate mortgage averaged 5.78% in the week ending June 16, up from 5.23% the week before.
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Rates have risen more than two-and-a-half percentage points this year. "Markets believed and applauded Chairman Powell’s resolve to fight rising inflationary pressures," said Quincy Krosby, chief equity strategist for LPL Financial in a note Thursday. "And that’s the problem." Investors are now concerned that the Fed is hitting the gas too hard and might be headed towards a policy mistake. The Dow fell by more than 800 points, tumbling below the key 30,000 level, as trader sentiment fell after Wednesday’s Federal Reserve announcement. Kroger is the latest major chain to highlight consumer shifts in response to rising prices for food, gas, rent and other goods and services. There’s not a lot thatJoe Biden,Congressor theFederal Reservecan do to bring down therecord high gas prices. Just last week, futures showed a less than 1% chance that rates would rise to the 2.25% to 2.5% level in June.
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Instead, oil companies are using their windfall profits to increase share repurchases or dividends and help boost their stock prices. Mortgage rates surged by more than half a percentage point this week amid rising inflation and an interest rate hike by the Federal Reserve, according to Freddie Mac. In the letter on Tuesday, Biden called for oil companies to boost supply of gasoline and slammed the high profit margins as “unacceptable” at a time when families are grappling with record-high prices.
Increasing energy supply, especially enough to rebalance markets, will be difficult. It would take many months, maybe years, to significantly increase US refinery capacity to match where it was before the pandemic. And oil companies seem committed to not flooding the market with oil, which could drive down prices.