Stocks Take A Beating As Rate Hike Possibility Returns

Speculation is heating up before the 2 p.m. release of the minutes from the last FMOC meeting. Both equity and bond markets reacted strongly Tuesday in anticipation of the hawkish Fed report.

Stocks were trounced, with the S&P 500 off 0.9 percent to 2047. Treasury yields moved up but the 10-year remained steady at 1.75 percent. The Fed-sensitive two-year rose to 0.82 percent, from a low of 0.78 percent and the 30-year bond yield actually dipped slightly to 2.57 percent.

At the April 26-27th meeting, the Federal Open Market Committee kept rates steady and repeated its mantra that it would raise rates only when deemed necessary.

Today’s minutes will show that the FOMC is continuing to emphasize that its decisions on when to raise interest rates will depend strictly on economic data. According to some analysts, the economy is strong, wage growth is picking up and inflation appears to be firming, ample reasons for the Fed to introduce a rate hike by July to be followed by 2 or 3 more increases by the end of the year.

Fed officials believe that events happening in other countries certain affect a Fed decision, especially the volatility of the U.K. Brexit amendment scheduled for June 23rd and the uncertainty in China and Japan.

According to Steve Massocca of Wedbush Securities, however, last week’s weaker-than-expected jobless claims as well as April’s inadequate nonfarm payroll numbers are not significant enough to change the Fed’s directive. “It’s [the data] going from a mixed bag to not such a mixed bag,” he said. “Looking at these numbers broadly, I don’t see that huge a difference in economic activity than a few months ago.”

The possibility of Fed rate hikes put pressure on global stocks Wednesday. Hong Kong shares fell by 1.5 percent .HSI and Europe’s major markets were up by half a percent. Japanese shares were volatile with the Nikkei 225 ending the session flat. MSCI’s broadest index of Asia-Pacific shares outside Japan lost 1.1 percent, China’s CSI 300 also slipped 1.1 percent and the Shanghai Composite index was down 1.6 percent.