Federal Reserve's aggressive move to get ahead of the inflation curve

The Federal Reserve announced a 0.75% rate rise over night, a move the market had almost completely priced in. Inflation and labour force data to be released this morning in Australia should put the focus for ASX investors back on the Reserve Bank ’s next move.

U.S. stocks rallied on Wednesday with the S&P500 breaking a five-day streak of declines after the Federal Reserve approved its biggest interest-rate increase since 1994 announcing a 75bps rate rise overnight – a rise the markets had almost completely priced in

The S&P 500 rose 54.51 points, or 1.5%, to 3789.99, The Dow Jones Industrial Average added 303.70 points, or 1%, to 30668.53, and the Nasdaq Composite rose 270.81 points, or 2.5%, to 11099.15.

Technology stocks, which have been among the hardest-hit areas of the market this year, were among the biggest gainers with strong gains from Netflix, Atlassian, Zoom, Pinterest Snap and Tesla .

Best performing thematics included social media stocks, hydrogen, bitoechs and Chinese US listed companies. Yesterday China's May activity data surprised to the upside on policy support and reopening hopes

Stocks rose broadly, with 10 of the S&P 500’s 11 sectors ending higher. Energy stocks slid, marking a relatively rare retreat for the year’s best-performing S&P 500 sector. The S&P 500 energy sector fell about 2.1%. West Texas crude settled down 3%.

The Market seems somewhat comfortable with the more aggressive rate move given concerns the Fed was falling further behind the curve. Earlier this year, some economists argued that the central bank should think twice about raising interest rates to slow inflation. Rising prices, they argued, were a result of supply chains that had been snarled up by the pandemic, something interest rates can’t fix.

But now that supply chain problems have eased, and prices have nonetheless continued to rise, economists are instead pointing to continued intense demand for goods and services - something the Fed has now moved aggressively to dampen

The rate rise was below the more aggressive calls made by US hedge fund managers who would like to see further aggressive rate hikes into the immediate future. Bill Ackman the founder of Pershign Capital added that the sooner the Fed reaches its peak rate “and thereafter can begin to ease, the sooner the markets can recover”. He is expecting to see another 75bps rate rise in July.

Whilst former New York Federal Reserve chief William Dudley commented this week, “if you decide that the speed of getting there is just as important as the level that you’re going to get to, then why not get there faster?”

Markets now anticipate that the Fed will lift official interest rates to a peak of about 4 per cent by mid-2023.

USD Dollar came under pressure on the major crosses, particularly vs yen and sterling.
AUD Dollar leapt more than 2 per cent higher, topping US70¢; and Gold finished up 0.3%.
The spot price of iron ore fell 2.5%, and it’s poised to slip below $US130 a tonne. The latest decline came as benchmark Shanghai steel futures fell as worries grew that the rainy season would slow construction activity in China. Data out of China continues to be mixed.

Bitcoin futures were down 2.1%, off worst levels but continuing recent weakness. Crypto losses are now estimated to be around $2 trillion exaggerated by leverage offered with numerous platforms around the ecosystem making overcollateralized loans against crypto currencies

Only last week Crypto lender Celsius Network told users that it was pausing all withdrawals, swaps and transfers between accounts because of extreme market volatility. That’s because when you are in the business of taking deposits to make loans to crypto speculators, and crypto prices drop by more than 50%, you find yourself freezing withdrawals and talking to restructuring lawyers.

Australian shares are poised to rise, taking direction from Wall Street after Federal Reserve chairman Jerome Powell reinforced the central bank’s determination to tackle inflation.

ASX futures were up 21 points or 0.3 per cent, to 6627 near 6.30am AEST, reversing earlier losses. with May’s labour force data set for 11.30am
 
Dividend-pay

There are four companies set to pay eligible shareholders today

Dalrymple Bay Infrastructure (ASX:DBI)
My Food Bag Group (ASX:MFB)
NB Global Corporate Income Trust (ASX:NBI)
Resmed Inc (ASX:RMD)

Commodities

Iron ore has lost 2.5 per cent to US$130.85. Its futures point to a 1.5 per cent fall

Gold has gained $6.10 or 0.3 per cent to US$1820 an ounce. Silver was up $0.47 or 2.2 per cent to US$21.42 an ounce.

Oil has lost $3.62 or over 3 per cent to US$115.31 a barrel.

Currencies

One Australian Dollar at 7:10 AM has strengthened since yesterday, buying 70.06 US cents (Wed: 68.76 US cents), 57.62 Pence Sterling, 93.78 Yen and 67.11 Euro cents.

Are you a 708 sophisticated investor?

A sophisticated investor is defined under Section 708 of the Corporations Act (net assets of $2.5 million or annual incomes in excess of $250,000).

They are eligible to receive information regarding wholesale investment opportunities that are not available to regular or retail investors.

Please subscribe if you would like to be alerted to these types of opportunities.