Stocks On Wall Street Plunge After Rate Hike and Projections

  • Sep 21, 2022
  • Barry Adams
  • The Federal Reserve lifted rates by a large amount for the third time in a row, sharply lowered its 2022 growth outlook and revised higher unemployment rate estimate. The interest rates are likely to go up by least another 125 basis points by the end of 2022.

    Stocks turned lower and accelerated the declines in the final fifteen minutes of trading two hours after the Federal Reserve lifted key lending rates. 

    As expected, the Fed lifted the fed fund target rate range by 75 basis points to 3% and 3.25% and held out for more hikes in the rest of the year. 

    Rates are expected to increase at least another 125 basis points in the rest of the year, according to the projections released by the Fed. 

    The Fed also lowered its projection for 2022 economic growth to 0.2% from the previous estimate of 1.7% in June and lifted jobless rate projection to 3.8% from 3.7%. 

    The Federal Open Market Committee statement also confirmed that the central bank is on target to drain liquidity and sell Treasury securities and mortgage bonds as outlined in its plan in May. 

    According to that plan, the Fed increased its sale of Treasury securities to $60 billion and mortgage securities to $35 billion a month from September 1.   

    The fifth rate increase and third rate hike of 75 basis points in a row is still not having the desired effect that the policymakers had hoped for. 

    After six months of rate hikes and cooling of economic activities, inflation is still running near 4-decade high and showing no signs of cooling. 

    Fed Chair Powell stressed that the "core PCE is still high" and running near 4.5% and the measure of inflation is not likely to ease to the targe rate of 2% till 2025. 

    The supply-driven inflation is well entrenched in the economy and gasoline powered inflation has spread wide and deep. 

    Chairman Powell also highlighted the difficulty of taming elevated inflation, driven by supply chain issues beyond the control of the central bank, and said shelter price inflation is likely to stay high for some time to come. 

    Stocks on Wall Street plunged and the major averages turned the morning rise of 0.6% to a loss of 1.8%. 

    Inflation has been running ahead of the Fed's target rate of 2% for 24 months in a row and the Fed has been lagging in its response in tackling rapid price increases. 

    In many ways, the Fed is not only battling high inflation but also fighting to restore its diminished credibility for failing to spot and tackle inflation early on.

    The Fed's aggressive money printing in the last decade is the largest contributor in creating conditions for rapid price increases. 

    Since 2008, the Federal Reserve has created and added $9 trillion of new money to the financial system and increased the money supply by 40% just in the last three years.   

    The yield on the 2-year Treasury notes soared to 4,1%, a level last seen in 2007 and 10-year notes increased to 3.51% and 30-year bonds to 3.49%. 

    The S&P 500 index fell 1.7% to 3,789.93 and the Nasdaq Composite index declined 1.8% to 11,220.19. 

    Energy prices traded higher after Russia mobilized 300,000 reserve troops to bolster its military presence in Ukraine raising the prospects of a prolonged war. 

    Crude oil traded down 95 cents to $83.03 a barrel and natural gas edged up 4 cents to $7.75 a thermal unit.  

     

    Existing Home Sales Fall in August 

    Existing home sales edged down 0.4% in August from the previous month to a seasonally adjusted annual rate of 4.8 million units, according to the data released by the National Association of Realtors. 

    Home sales were the lowest since May 2020, and July sales were downwardly revised to 5.7% decline. 

    The median price of a home gained 7.7% from a year ago to $389,000. Unsold home inventories declined to 1.28 million, or equivalent to 3.2 months of supply at the current sales rate. 

     

    European Markets Set to Fall On Thursday 

    European markets are set to fall at the opening on Thursday after the U.S. Fed lifted its key lending rate and held out for more gains in the year and beyond. 

    European bourses traded near flat-line in cautious morning trading ahead of the Fed's rate-hike decision after the market-close.

    Market indexes scaled higher after the U.S. markets advanced with the presumed 75 basis points rate increase later in the day.  

    The Bank of England, the Swiss National Bank, the Norges Bank of Norway and the Bank of Japan are also expected to announce their rate decisions on Thursday. 

    The DAX index added 0.6% to 12,741.19, the CAC-40 index gained 0.7% to 6,022.49 and the FTSE 100 index increased 0.5% to 7,230.87. 

    Energy prices traded higher after Russia mobilized 300,000 reserve troops to bolster its military presence in Ukraine raising the prospects of a prolonged war. 

    However, in Europe, TTF natural gas price advanced 4% to 202.50 euros a megawatt hour. 

    Brent crude oil traded down 65 cents to $89.93 a barrel. 

    Resource stocks were in focus after crude oil and commodities prices advanced. 

    Antofagasta, BHP Limited, Anglo American and Glencore gained between 1% and 3%. 

    Homebuilders in the U.K. gained on the hopes that the recently appointed Prime Minister Liz Truss may lower stamp duty in the government's mini-budget this week. 

    Taylor Wimpey, Persimmons and Barratt Developments increased between 2% and 4%. 

     Uniper SE plunged 31.2% to 2.38 euros after Germany nationalized the natural gas importer and the electric utility. 

    A German government agency acquired the company stake held by Fortum Oyj for 1.70 euros a share. 

    Vallourec SA increased 6.1% to 10.37 euros after the maker of premium casing and tubing products signed a 10-year sales agreement with Saudi Arabia based Aramco. 

    Schneider Electric SE increased 1.5% to 117.80 euros after the company agreed to acquire stakes held by minority shareholders in Aveva Plc for 3,100 pence a share. 

    The offer price is 41% premium to the last closing price of 2,192 pence before the commencement of the offer period. 

    Aveva Group Plc rose 1.8% to 3,108 pence.