Updated at 12:11 pm EST
U.S. stocks moved higher Wednesday, following on from a session which consolidated a bear market for the S&P 500, as investors looked to perhaps the most important Federal Reserve rate decision in more than a decade.
Surging inflation, record-high gas prices, rising jobless claims data and a slowing domestic economy will all likely weigh on the Fed’s rate decision, scheduled for 2:00 pm Eastern time, as traders brace for a potential shock to the central bank’s communicated desire for a series of modest 50 basis point increases.
Rate traders are now locking-in the prospect of a 75 basis point move later today, which would take the Fed Funds rate to a range of between 1.5% and 1.75%, as well as a follow-on move of the same size at the Fed’s July meeting as inflation holds at the highest levels in forty years and looks set to accelerate further over the summer months.
“This week’s dramatic change in rate expectation headlines was suggestive of the Fed making the decision that given the seemingly intransigent and broadening of inflationary pressures more needed to be done – and quickly,” said Quincy Krosby, chief equity strategist for LPL Financial.
“The change in the headline from 50 basis points to 75 basis points reflects a stark reality but it also reflects the Fed’s determination to underscore its commitment to its mandate to maintain price stability,” he added. “It’s neither a trial balloon nor a lead balloon. It’s reality.”
The Fed’s scheduled meeting, however, now comes just hours after an emergency gathering of policymakers at the European Central Bank, who convened Wednesday in Frankfurt amid wide-scale disruption in global and regional bond markets linked in part to the market’s changing predictions of Fed rate hikes.
Benchmark 10-year German bund yields are now trading at the highest levels since 2014, at 1.77%, while the extra yield, or spread, that investors demand to hold lower-rated paper such as Italian government bonds has rise to around 2.4%, levels only last seen during the region’s debt crisis.
The ECB said it would quicken the design of its “anti fragmentation” tool, aimed at keeping market yields low for indebted Eurozone nations, while reinvesting bonds from its pandemic-era purchase program into “more indebted nations like Italy, Spain and Greece.”
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Markets will also need to navigate a key reading of U.S. retail sales at 8:30 am Eastern time, which showed a surprise 0.3% contraction — alongside a downward revision to the April tally — as consumers pulled back on discretionary spending amid the fastest inflation in four decades and record high gas prices.
The cautious market backdrop, however, hasn’t yet pushed stocks into the red, with Europe’s region-wide Stoxx 600 marked 1.54% higher in mid-afternoon Frankfurt trading, following on from an essentially flat session for Asia’s MSCI ex-Japan benchmark.
In the U.S., benchmark 10-year Treasury bond yields eased to 3.40%, against 2-year notes trading at 3.344%, while the the dollar index edged 0.01% higher from yesterday’s 20-year high against a basket of six global currencies to 105.518 in early New York trading.
On Wall Street, the Dow Jones Industrial Average gained 146 points in late-morning trading while the S&P 500 added 37 points. The tech-focused Nasdaq rose 195 points.
In other markets, Bitcoin prices extended declines again Wednesday, pulling the world’s biggest crypto currency close to the $20,000 level, as investors continue to dump non-yielding digital assets amid a surge in risk-free bond yields ahead of today’s Fed rate decision.
Bitcoins were last seen 4.4% lower on the session at $21,400.00, a move that extends its year-to-date decline to around 50%. Broader crypto markets, which peaked at $2.9 trillion last year, have lost nearly $1 trillion in collective value over the past two months.
Oil was also moving lower ahead of today’s Energy Department data on domestic crude inventories, with President Joe Biden calling on companies such as Exxon Mobil XOM and Chevron CVX to expand refining capacity in order to help bring down record high gas prices, urging them to put investments over profits amid the country’s energy crisis.
“At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable,” the President said in a letter sent to a host of U.S. oil majors. “The lack of refining capacity – and resulting unprecedented refinery profit margins – are blunting the impact of the historic actions my Administration has taken to address Vladimir Putin’s Price Hike and are driving up costs for consumers.”
The national average price for a gallon of gas held at $5.014 on Tuesday, according to AAA data, the highest nominal cost on record and a 63% from the same period last year, thanks to a combination of dwindling domestic supplies, surging summer demand and the impact of Russia’s war on Ukraine on global crude markets.
WTI crude futures for July delivery were marked 54 cents lower on the session at $118.39 pe barrel while Brent contracts for August, the global benchmark, fell 55 cents to $120.61 per barrel.