Ahead of FOMC, New York Stock Market Starts Higher on 'Pause' Expectations... S&P Breaks Above 4300

by Cho Seulkina

Published 13 Jun.2023 00:08(KST)

The major indices of the U.S. New York stock market showed a slight rise early in trading on the 12th (local time) as expectations for a pause in the benchmark interest rate spread ahead of the scheduled release of the May Consumer Price Index (CPI) and the June Federal Open Market Committee (FOMC) regular meeting this week increased.

At around 10:37 a.m. that day, the Dow Jones Industrial Average was trading at 33,891.25, up 14.47 points (0.04%) from the previous close at the New York Stock Exchange (NYSE). The S&P 500, which is centered on large-cap stocks, was up 5.94 points (0.14%) at 4,304, and the tech-heavy Nasdaq was up 63.66 points (0.48%) at 13,322.

Currently, within the S&P 500, technology, communication, and discretionary consumer goods stocks are rising, while other sectors including energy are declining. Tesla's stock price rose nearly 1% again, continuing its record-long 12 consecutive trading day rally. Following Ford, General Motors (GM) also announced a partnership with Tesla's high-speed charging station Supercharger, which is seen as positive news. Oracle, which is scheduled to announce earnings after the market close, is rising nearly 5% as investment banks including Wolfe Research have been raising their investment ratings day after day. Cruise operator Carnival also jumped about 13% after JP Morgan upgraded its investment rating. On the other hand, the Nasdaq fell more than 10% on news that it will acquire software company Adenza for $10.5 billion.

[Image source=Reuters Yonhap News]

Investors are awaiting the CPI and FOMC results to be released this week. Since March last year, the Fed has continued steep tightening with 10 consecutive rate hikes, and there is a flood of forecasts that the Fed will finally take its first 'breather' by pausing rates at the FOMC meeting on June 13-14.

Currently, the market sees skipping the June rate decision and possibly raising rates as early as July, the so-called ‘hawkish skip,’ as the most likely scenario. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects nearly a 75% chance that the Fed will hold rates steady at this week’s FOMC. The market also prices in more than a 50% chance of a baby step (0.25 percentage point increase) in July after the June pause.

Dylan Cremer, co-Chief Investment Officer (CIO) of Sutiety, reinforced the view on CNBC that if the Fed skips a rate hike in June, it does not mean the rate hike cycle is over. Cremer said, "I am not confident that there will be no more rate hikes," adding, "I see a 50-50 chance of another hike in this cycle." He further stated, "All else being equal, the CPI report could be a short-term tailwind that allows the market to continue rising."

However, if the May CPI released just before is stronger than expected, the Fed cannot rule out additional hikes this month instead of a pause. Previously, the central banks of Australia and Canada surprised markets by raising rates despite expectations of a pause. Currently, experts surveyed by The Wall Street Journal (WSJ) expect the May CPI to rise 0.1% month-over-month and 4.0% year-over-year, showing a slowdown in the increase compared to April.

The Fed’s monetary policy decision is expected to be a turning point for the New York stock market, which has been on an upward trend recently. The S&P 500, which entered a bull market last week, is trading above 4,300 during the session. Based on the judgment that rate hikes are nearing an end, Goldman Sachs has raised its year-end S&P 500 forecast from 4,000 to 4,500, seeing more than 5% upside potential. However, some analysts argue that unlike the index, most stocks are still in a downtrend, indicating the bear market is not over yet. If the Fed opts for a surprise hike instead of a hawkish pause, the stock rally could collapse. There have been cases in 2000 and 2008 bear markets where the market rose more than 20% from the previous low before plunging again.

This week, besides the U.S., Europe, Taiwan, Hong Kong, and Japan will also hold monetary policy meetings. The European Central Bank (ECB) is widely expected to raise its policy rate by 0.25 percentage points to 3.75% at the meeting on the 15th. The Bank of Japan (BOJ), which is scheduled to decide on rates on the 16th, is expected to maintain its current policy.

In the New York bond market today, Treasury yields are rising. The 10-year U.S. Treasury yield is around 3.77%, and the 2-year Treasury yield, which is sensitive to monetary policy, is around 4.61%. The dollar index, which shows the value of the dollar against six major currencies, is steady around 103.6. International oil prices are falling. The July West Texas Intermediate (WTI) crude oil price is down 3.93% from the previous close, trading at $67.50 per barrel.