Street Cred. At one point on Wednesday, the S&P 500 was sitting on its biggest intraday comeback since 2003. Then Kevin Warsh started talking.
The new Federal Reserve chairman did little to ease investor concerns about the central bank's fight with inflation, so the S&P 500 closed down 1.5%.
The Dow Jones Industrial Average sank 2.2% The Nasdaq Composite fell 1.7%.
Warsh didn't offer much insight into the Fed's expectations going forward, though he did say, " The Fed's on the case."
Stocks were already selling off amid a surge in oil prices and a wave of weak earnings reports. A relief rally took hold at around 2 p.m. ET when the Fed opted to keep interest rates steady, and the S&P and Nasdaq were both trading higher, but that changed when Warsh began dodging questions from reporters.
Sevens Report Research's Tom Essaye told me it felt like Warsh was lecturing market participants about his plans to dial back communication and reshape the central bank. Essaye described the central banker as "a very glib man."
"I'm not saying that he's not going to be the greatest Fed chair in the world -- maybe he will be -- but you've introduced a radical change to one of the most important parts of the market," Essaye said. "It's not a game. People are trying to not lose money. And we're trying to manage where interest rates are going, so it just seems to me like a very radical communication alteration."
Essaye adds that Warsh "lost a little bit of inflation credibility" from the bond market, where some traders are concerned that rising inflation caused by the Iran war could be challenging for the central bank to navigate. Odds of a hike were north of 30% just 20 minutes before the Fed released its decision, according to the CME FedWatch Tool.
"The best way to sum it up is that the market is questioning whether Warsh's tough talk about inflation is just that -- tough talk not backed up by action," Steve Sosnick, the chief strategist at Interactive Brokers, told me.
Sosnick points to a "huge steepening" of the yield curve: The yield on the 30-year Treasury note spiked to 5.14% on Wednesday, while the 2-year yield was down to 4.23%.
"Stocks are now responding to bonds," Sosnick said. "Higher yields and inflation are not positive for equity valuations, especially when we were already jittery about the consequences for tech spending."
Hence the market rebound that wasn't.
The Hot Stock: Garmin +16.2% The Biggest Loser: Lennox International -21.0%
Best Sector: Energy +2.0% Worst Sector: Industrials -3.2%
A Messy Earnings Season Continues
Investors looking to Magnificent Seven earnings for a win after Wednesday's wipeout will have to keep waiting.
Meta Platforms missed earnings expectations and boosted the midpoint of its full-year capital expenditures forecast, my colleague Nate Wolf reports. The stock sank nearly 10% in extended trading.
Meta was already down 11% this year, so the report will do little to win over investors regarding its massive AI spending. Nate writes:
Investors wanted more details on Meta's AI strategy when the social-media giant reported second-quarter results on Wednesday. Instead, they got weaker-than-expected earnings and a warning about potential legal troubles.
Meta follows Google's parent Alphabet and Tesla in falling sharply after reporting quarterly numbers. But Microsoft, which also reported tonight, offered a strong contrast.
Shares were up 2% after the company toped fiscal fourth-quarter expectations for earnings. Adam Levine writes for Barron's:
Microsoft batted back two negative narratives with the results, showing a return on its extensive cloud investments and a software segment that keeps beating expectations.
Whether good or bad, the latest round of earnings reports likely won't do much to staunch the bleeding in chip stocks: The iShares Semiconductor ETF was down 1.5% in extended trading after tumbling 5.4% today.
The Calendar
Air Products & Chemicals, Altria Group, Amazon.com, American Electric Power, Apple, A.O. Smith, Arthur J. Gallagher, Bristol Myers Squibb, Builders FirstSource, Cigna, Coinbase Global, Corteva, DexCom, Edison International, First Solar, GoDaddy, Hershey, Huntington Ingalls Industries, Ingersoll Rand, Intercontinental Exchange, International Paper, KKR, Labcorp Holdings, Live Nation Entertainment, Martin Marietta Materials, Mastercard, Monolithic Power Systems, Norwegian Cruise Line Holdings, Quanta Services, Regeneron Pharmaceuticals, Sanofi, Shell, Southern Co., Stryker, Trane Technologies, Valero Energy, Weyerhaeuser, and Yum! Brands announce quarterly results tomorrow.
The Bureau of Economic Analysis releases the personal consumption expenditures price index for June. Economists forecast a 3.7% year-over-year increase, four-tenths of a percentage point less than in May. The core PCE price index, which excludes volatile food and energy prices, is expected to rise 3.3%, compared with 3.4% previously.
The BEA reports its advance estimate of second-quarter gross-domestic-product growth. The consensus call is for the economy to have growth at a seasonally adjusted annual rate of 2.1%, matching the first quarter.
-- Dan Lam
What We're Reading Today
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