Romain Fournier

Chief Editor
Having worked in the British, French and Swiss financial press, Romain is able to report on local and international issues, as comfortable in French as in the language of Shakespeare, Romain Fournier leads the editorial team at Marketscreener. Fine connoisseur of the English-speaking markets, Romain delivers an editorial every day on US and UK markets.

Another win for Powell

05/05/2022 | 09:58am EDT
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Jerome Powell is sometimes nicknamed "Goldilocks". Why? Because he often manages to deliver a speech that is neither too hot nor too cold, just perfect. He won over investors yesterday, sparking a positive stock market reaction despite announcing a 0.5% rate increase.

The Dow Jones gained 2.88%, the S&P500 recovered 2.99% and the Nasdaq 3.41%. Prior to that, Wall Street indexes were looking pretty bad. The pattern we are now seeing is rather classic following a Fed announcement that is a little less aggressive than expected. One should keep in mind that the interests of the financial markets do not always coincide with the interests of the real economy, or rather, their horizons may be different.

The Fed raised its rates by 50 basis points, bringing them from the "0.75% to 1%" range versus 0.25% to 0.50%" previously. This is, as we've been hearing a lot lately, the biggest hike since May 2000.

The Fed will start reducing its balance sheet on June 1, by $47.5 billion per month. Starting in September, the pace will increase to $95 billion per month. This is "tapering", or quantitative tightening: the Fed is reversing the asset purchases that helped the economy weather the recent storms. With the central bank's treasure chest filled up to the tune of $9,000 billion, it would take about 7 years to bring it back to its pre-2008 level, i.e. around $1,000 billion.

The rate hikes will continue, at a rate of 50 basis points per meeting, as long as necessary to deflate inflation.

Jerome Powell estimates that the state of the US economy (growth, full employment, investment) allows for these rate hikes, which "will not be pleasant" but which in the end will make "everyone feel better".

So far, very classical. But I was talking yesterday about the importance of form, and that's what explains the rise in US indices last night: Powell ruled out the possibility of a 75-basis point hike at the next meeting, even though part of the market had feared it. Two comments on this subject. First, the Fed had recently let its "hawks" - those members most in favor of aggressive actions - loose to suggest that a 75-basis point hike was not out of the question. Any resemblance to a ploy by Powell to dismiss this scenario a few days later is not entirely coincidental. Secondly, investors, who always try to anticipate, like it when their extreme scenarios do not come true. It is a sign that the situation is closer to normal, i.e. to their normality, not necessarily to the economic normality (which does not fit well with an annual inflation of 8.5%).

Obviously, from a macroeconomic point of view, these rate hikes will cause major disruptions in the United States by increasing the cost of borrowing, whether to buy a house or to invest in the development of a business. But letting inflation get out of control would be even more damaging. Of the two disorders, the Fed has chosen the one it considers less damaging. Economists are predicting two more 50 basis point hikes at the June and July meetings. Then others, less strong afterwards.

Today, the Bank of England also unveiled a rate hike. It announced an increase from 0.75% to 1.0%, a level not seen in 13 years.

 

Economic highlights of the day:

The Challenger survey on layoffs and weekly employment data are on the agenda.

The dollar is up to EUR 0.9468. The ounce of gold rebounds to USD 1900. Oil is strengthening, with North Sea Brent crude at USD 112.77 a barrel and US WTI light crude at USD 109.63. The yield on 10-year U.S. debt falls to 2.91%. Bitcoin is trading around USD 39,200.

 

On markets:

* eBay announced Wednesday that it expects second-quarter revenue to fall short of expectations, sending the stock down 7% in pre-market trading.

* MetLife - The insurance company reported better-than-expected first-quarter profit on Wednesday on higher premiums and commissions.

* Booking Holdings reported better-than-expected first-quarter earnings Wednesday and said it expects a strong summer season, particularly in Europe. The stock was up about 7 percent in after-hours trading.

* Twitter - Elon Musk has secured $7.14 billion in financing from a group of investors including Oracle co-founder Larry Ellison to fund his acquisition of Twitter, a filing shows.

In addition, Twitter received a frosty reception Wednesday night when it presented a plan to advertisers at an event in New York, three ad agency executives reported, as the social network's plans have been uncertain since the announcement of its acquisition.

* Uber shares are still down 1% in premarket trading a day after the VTC and meal delivery specialist reported its quarterly results, with nine intermediaries cutting their price target on the stock.

* The U.S. broadband internet providers dropped a challenge Wednesday night to California's net neutrality law that prohibits them from blocking or regulating traffic based on usage.

* Berkshire Hathaway - Warren Buffett's company bought an additional 5.9 million shares of Occidental Petroleum for about $336 million, bringing its stake in the oil company to 15.2 percent, a stock exchange notice showed Wednesday night.

* Chesapeake Energy - Investment firm Kimmeridge said Wednesday it has taken a 1.5 percent stake in Chesapeake Energy and is in discussions with the company's management to boost its stock price.

* Albermarle - The lithium producer on Wednesday raised its full-year revenue and profit forecasts after a better-than-expected quarterly result linked to solid demand and higher prices for the metal used in batteries for electric vehicles.

* Energy Transfer - The oil infrastructure specialist on Wednesday raised its full-year adjusted profit forecast after reporting higher transport volumes in all its business segments in the first quarter.

* Corteva on Wednesday reported operating profit ahead of Wall Street expectations, supported by strong demand for herbicides and insecticides.

 

Analyst recommendations:

Advanced Micro Devices: UBS adjusts price target to $110 from $150, maintains neutral rating.

Airbnb: UBS raises price target to $185 from $178, maintains neutral rating.

Diamondback Energy: Raymond James adjusts price target to $215 from $200, keeps strong buy rating.

Lyft: Evercore ISI adjusts lyft's price target to $45 from $60, keeps outperform rating.

Ocado: HSBC upgrades from sell to hold targeting GBp 1000.

PVH Corporation: OTR Global downgrades PVH to Mixed from Positive.

Rockwell Automation: Stephens adjusts rockwell automation's price target to $250 from $350, keeps equalweight rating.

S&P Global: Morgan Stanley adjusts price target to $419 from $459, keeps overweight rating.

Starbucks: DA Davidson adjusts price target to $105 from $120, maintains buy rating.

Thomson Reuters: Morgan Stanley adjusts price target to $104 from $108, keeps equalweight rating


© MarketScreener.com 2022
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Stocks mentioned in the article
ChangeLast1st jan.
ADVANCED MICRO DEVICES, INC. -4.17% 73.22 Delayed Quote.-46.86%
AIRBNB, INC. 0.98% 89.9 Delayed Quote.-46.50%
BERKSHIRE HATHAWAY INC. 0.61% 411407.33 Delayed Quote.-8.79%
BOOKING HOLDINGS INC. 0.20% 1752.43 Delayed Quote.-27.10%
CHESAPEAKE ENERGY CORPORATION 0.64% 81.59 Delayed Quote.25.70%
CORTEVA, INC. -1.40% 53.36 Delayed Quote.14.51%
DIAMONDBACK ENERGY, INC. -1.75% 118.99 Delayed Quote.12.33%
EBAY INC. 1.42% 42.23 Delayed Quote.-35.83%
ENERGY TRANSFER LP -0.20% 9.95 Delayed Quote.21.26%
LYFT, INC. 0.38% 13.3104 Delayed Quote.-68.92%
METLIFE, INC. -0.14% 62.69 Delayed Quote.0.48%
OCADO GROUP PLC 4.20% 814 Delayed Quote.-53.44%
PVH CORPORATION -1.32% 56.15 Delayed Quote.-46.65%
ROCKWELL AUTOMATION, INC. -0.94% 197.42 Delayed Quote.-43.48%
S&P GLOBAL, INC. 0.07% 337.09 Delayed Quote.-29.07%
STARBUCKS CORPORATION 2.21% 78.08 Delayed Quote.-34.69%
THOMSON REUTERS CORPORATION 1.53% 134.19 Delayed Quote.-11.29%
TWITTER, INC. 0.75% 37.6401 Delayed Quote.-12.54%
UBER TECHNOLOGIES, INC. 1.42% 20.75 Delayed Quote.-51.20%
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