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U.S. stocks posted modest gains at Wednesday’s open as investors face the Federal Reserve’s seventh and final interest rate increase of 2022.
The central bank is expected to deliver a half-percentage-point hike at the conclusion of its two-day policy meeting at 2 p.m. ET. The increase is set to bring its key federal funds rate to a new range of 4.25% to 4.5%, the highest level since December 2007.
The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) each inched up 0.2%. The technology-focused Nasdaq Composite (^IXIC) rose about 0.1%. In other markets, U.S. Treasuries dipped after climbing on Wednesday, and the U.S. dollar index retreated. West Texas Crude Oil (WTI) futures rose 1% to trade above $76 per barrel.
Investors will assess remarks from Fed Chair Jerome Powell at 2:30 p.m. ET in the aftermath of the rate announcement. Economic projections from policymakers and the latest dot plot showing each member’s forecast for the U.S. short-term interest rate will also serve as guidance to investors on the Federal Reserve’s path forward.
The decision will follow Wednesday’s closely watched November Consumer Price Index (CPI), which rose at an annual 7.1% clip last month, the second consecutive downside surprise in inflation data. Stocks closed higher following the report, but Wall Street’s reaction was underwhelming, with uncertainty still ahead around how much further rates need to go to quell prices that remain persistently high.
While a downshift in inflation was welcome on Wednesday, equity markets pared much of the gains that came immediately following the print as traders thought, “what now?,” BMO Wealth Management’s Chief Investment Strategist Yung-Yu Ma said in an emailed note.
“The Fed is still going to focus on the labor market imbalance, a dovish pivot is still a long way off, and in the meantime, companies and consumers have to recalibrate to the impact of higher interest rates and a slowing economy,” Ma added. “It’s all a balancing act, which we believe points to near-term choppy markets even though the improving inflation backdrop adds a positive bias.”
That view was echoed by other Wall Street strategists, including Bank of America Chief U.S. Economist Michael Gapen, who indicated that although November’s consumer price report reflected a faster retracement in core goods inflation than expected, services inflation remains sticky.
This week marks what is perhaps the last week of major U.S. economic events of the year for investors, with the government’s retail sales report also on the docket for Thursday. Even as a jam-packed economic calendar keeps traders busy domestically, traders will watch moves by central banks overseas, with policymakers from the U.K. Bank of England, Mexico, Norway, the Philippines, Switzerland, and Taiwan, all set to carry out their own rate decisions on Thursday.
The U.K. received its own inflation reading Tuesday: A rapid rise in consumer prices decelerated slightly to 10.7% from a year earlier in November, down from a 41-year high of 11.1% during the prior month. U.K. equities retreated as investors awaited the U.S. Federal Reserve’s messaging later today and the Bank of England’s rate decision Thursday. The pound traded near its highest level since June.
Back on this side of the Atlantic, all eyes were also on the latest developments in cryptoworld, with former CEO of fallen cryptocurrency exchange FTX Sam Bankman-Fried facing a wave of criminal charges for his handling of customer and investor assets.
On the corporate front, earnings from companies including Lennar (LEN), Trip.com (TCOM), and Weber (WEBR) are scheduled for release on Wednesday.
“This is unlikely to affect the Fed’s December decision – we continue to expect them to hike by 50 basis points – however, it may bring up discussions of another downshift in February,” Gapen said in a note penned along with his team at BofA. “We still think they go by 50 basis points given the tightness in the labor market and elevated wage growth, but the debate should be livelier especially if we get another soft December inflation report.”
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