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Financial Markets 05/01 15:47
NEW YORK (AP) -- U.S. stocks swung to a mixed finish on Wednesday after the
head of the Federal Reserve said the cuts to interest rates that Wall Street
craves so much are still likely, even if they're delayed because of stubbornly
high inflation.
The S&P 500 fell 17.30 points, or 0.3%, to 5,018.39 after the Fed held its
main interest rate at its highest level since 2001, just as markets expected.
The index had rallied as much as 1.2% in the afternoon before giving up all the
gains at the end of trading.
The Dow Jones Industrial Average rose 87.37, or 0.2%, to 37,903.29, and the
Nasdaq composite lost 52.34, or 0.3%, to 15,605.48.
On the downside for financial markets, Federal Reserve Chair Jerome Powell
said out loud the fear that's recently sent stock prices lower and erased
traders' hopes for imminent cuts to interest rates: "In recent months,
inflation has shown a lack of further progress toward our 2% objective." He
also said that it will likely take "longer than previously expected" to get
confident enough to cut rates, a move that would ease pressure on the economy
and investment prices.
At the same time, though, Powell calmed a fear swirling in the market, that
inflation has remained so high that additional hikes to rates may be necessary.
"I think it's unlikely that the next policy rate move will be a hike," he
said.
The Fed also offered financial markets some assistance by saying it would
slow the pace of how much it's shrinking its holdings of Treasurys. Such a move
could grease the trading wheels in the financial system, offering stability in
the bond market. Powell said the Fed did it to reduce "risk of money markets
showing stress."
Yields eased in the bond market following the move and Powell's comments.
The yield on the 10-year Treasury fell to 4.63% from 4.65% just before the
announcement, easing the pressure on the stock market. The yield on the
two-year Treasury yield, which more closely tracks expectations for the Fed,
dropped to 4.95% from 5.04% late Tuesday.
Traders themselves had already downshifted their expectations for rate cuts
this year to one or two, if any, after coming into the year forecasting six or
more. That's because they saw the same string of reports as the Fed, which
showed inflation remaining stubbornly higher than forecast this year.
Powell had already recently hinted rates may stay high for a while. That was
a disappointment for Wall Street after the Fed earlier had indicated it was
penciling in three cuts to rates during 2024.
Powell's comments Wednesday were largely seen as less harsh than feared.
"Yet, before markets get overly excited, it's worth remembering that the Fed
is responding to the unfolding economic data, just as we all are," according to
Seema Shah, chief global strategist at Principal Asset Management. "The next
few months of data are pivotal for the Fed path."
Without the benefit of easing rates, companies will need to deliver better
profits to support their stock prices.
CVS Health tumbled 16.8% after reporting weaker results for the latest
quarter than analysts expected. It said it's been hurt by increased costs at
its Medicare Advantage business, and it cut its forecast for profit over the
full year.
Starbucks dropped 15.9% after falling short of expectations for both profit
and revenue in the latest quarter. Sales trends weakened at its stores outside
the United States in particular, and it cut its full-year forecasts for profit
and revenue.
Super Micro Computer, which has been one of Wall Street's hottest stars,
gave back 14% despite topping expectations for profit. The company, which sells
server and storage systems used in AI and other computing, fell shy of
analysts' forecasts for revenue. Expectations had bult up after its stock had
already tripled this year amid a broad frenzy on Wall Street around
artificial-intelligence technology.
Advanced Micro Devices dropped 8.9% despite reporting profit that matched
expectations. Its revenue came in a bit shy of forecasts, as did the midpoint
of its forecasted range for revenue in the current quarter.
On the winning side was Amazon, which climbed 2.3% after reporting stronger
profit for the latest quarter than analysts expected. The retail behemoth
credited reaccelerating growth at its cloud-computing business, in part, as it
benefits from demand for AI.
Before the Fed's announcement, stocks and Treasury yields had been moving
relatively little following some weaker-than-expected reports on the economy.
One report from the Institute for Supply Management said the U.S.
manufacturing sector unexpectedly fell back into contraction last month.
A separate report said U.S. employers were advertising slightly fewer jobs
at the end of March than economists expected. The hope on Wall Street has been
that a cooldown could help prevent upward pressure on inflation. The downside
is that if it weakens too much, a major support for the economy could give out.
Some recent economic reports raised fears about the potential for a
stagnating economy combined with high inflation. The Fed doesn't have great
tools to fix such a scenario, called "stagflation."
But Powell downplayed the risk of that and said inflation is much lower and
economic growth is better than the last time stagflation struck in the 1970s
and 80s.
"I don't see the 'stag' or the 'flation,'" he said.
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AP Writers Matt Ott and Zimon Zhong contributed.
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