Dow down 100 points, Nasdaq edges higher after Powell reiterates Fed could raise rates twice more

What’s driving markets

Traders were digesting the latest commentary by central bank leaders from around the world at European Central Bank’s annual forum in Sintra, Portugal. Fed chair Powell, Bank of England Governor Andrew Bailey, ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda took the stage to defend their monetary policies and vowed to keep working to combat the inflation.

See: Powell and other central bankers vow to keep fighting inflation until there is evidence of success

Powell reiterated in the panel discussion on Wednesday that a “strong majority” of Fed policy makers were looking for two more quarter-percentage-point interest-rate increases this year, and they did not rule out more rate hike action at their next policy meeting in July. The Federal Open Market Committee will hold its next meeting from July 25 to July 26, and the following one from September 19 to September 20.

The Fed hadn’t made a decision to deliver rate increases at every other meeting, Powell said, but he “wouldn’t take moving consecutive meetings off the table at all.”

“Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” Powell said.

See: The Fed’s been hawkish even as CPI recedes. A Bernanke research paper helps explains why.

Central bankers all have struck a hawkish tone, suggesting that interest rates haven’t yet peaked and cuts are not on the cards for some time, said Jennifer McKeown, chief global economist at Capital Economics. However, there were some differences in tone. 

The Fed seems closer to peak rates than either the ECB or the Bank of England, said McKeown. Although all three sounded distinctly hawkish, Powell highlighted early signs of loosening in the labor market while neither Lagarde nor Bailey had seen any such cause for relief, she said.

“Powell was keener to stress that interest rates are in restrictive territory and that the closer they come to the peak, the higher the risk of doing too much,” wrote McKeown in emailed commentary on Wednesday. “Both Lagarde and Bailey seemed more concerned about the risk of doing too little and allowing inflation expectations to become unanchored.”

Fed fund futures traders are pricing in an 82% chance that the Fed will raise its key interest rate by 25 basis point in July, according to CME FedWatch Tool.

“There’s still some level of uncertainty out there about what the Fed’s going to do and how many more times they are going to hike,” said Chris Fasciano, Portfolio Manager, Commonwealth Financial Network. “So I think we are going to continue to see this volatility in the market based on the news or the Fed commentary of the day.”

Meanwhile, with positive economic data such as the consumer-confidence index published on Tuesday, “the soft landing scenario is in play,” Fasciano said in a call. “I think that’s all part of this data point-to-data point volatility.”

Powell said on Wednesday that a recession is “not the most likely case,” but it’s certainly possible, he said.

See: Nvidia and AMD shares fall on report of new U.S. ban on AI chip exports to China

Weighing on sentiment though was a report that said the Biden administration is considering a new ban on sales of AI chips to China.

The chip maker’s chief financial officer Collette Kress said during an webinar on Wednesday she sees no near-term impact to its business should the Biden administration widen U.S. export bans on AI tech to China, but voiced concern about long-term impacts of a move.

Nvidia
NVDA,
-1.81%
stock was down 1% Wednesday afternoon, while Advanced Micro Devices
AMD,
-0.20%
edged up 0.2% and Intel Corporation
INTC,
-1.55%
tumbled 1.3%. The iShares Semiconductor ETF
SOXX,
-0.77%
declined by 0.6%.

“Nvidia, which makes 20% of its revenues in China, has produced lower-end chips that don’t require an external export licence. However, the article suggests that even these may be included going forward,” said Jim Reid, strategist at Deutsche Bank.

U.S. bank shares slipped ahead of the Fed’s annual “stress test” results, which would help determine whether the nation’s largest banks could withstand a severe economic downturn. The Invesco KBW Regional Banking ETF
KBWR,
-0.62%
shed 1.1%, while the SPDR S&P Bank ETF
KBE,
-0.34%
was down 0.6%. The Fed is set to release the results after the closing bell on Wednesday.

See: Fed official eyes ‘reverse stress tests’ for banks as results awaited after 2023 bank failures

In U.S. economic data, the trade deficit in goods narrowed 6% in May due to lower oil prices and less demand among consumers for imports, perhaps a sign of a softer U.S. economy. The trade gap in goods declined to $91.1 billion from a six-month high of $97.1 billion in April, the Census Bureau said. U.S. advanced retail inventories in May jumped 0.8%, while U.S. advanced wholesale inventories in May drop 0.1%.

Investors are awaiting the initial jobless claims data and the final reading of first-quarter GDP tomorrow, as well as the Personal Consumption Expenditures (PCE) index reading on Friday to assess the state of the economy.

Companies in focus

• General Mills
  GIS,
  -5.15%Inc.’s
  stock slid 4.8% Wednesday, after the parent of brands including Cheerios, Nature Valley, Blue Buffalo pet products and Pillsbury, posted a steep decline in profit and weaker-than-expected sales for its fiscal fourth quarter.

• Mullen Automotive Inc.
  MULN,
  -19.52%
  sank 14.9%. The ongoing selloff comes even after the company said Tuesday that it received an additional $100 million in funding from certain investors, which leaves the company with more than $235 million in cash and cash equivalents on its balance sheet.

• Roivant Sciences Ltd. 
  ROIV,
  +11.27%
  shares went up 10.4% after the company said it had a net loss of $33.6 million, or 20 cents a share, for its fiscal fourth quarter to March 31, narrower than the loss of $270.1 million, o4 39 cent a share, in the year-earlier period.

• Cruise stocks soared on Wednesday with shares of Carnival Corporation
  CCL,
  +8.84%
  up 8.3% and Norwegian Cruise Line Holdings
  NCLH,
  +7.61%
  jumped 7.4%.

— Jamie Chisholm contributed