Powell Takes the Stage: Rate Hike Expected Today, But Could There Be a Pause Soon?

(Wednesday market open) For the second straight meeting, the Federal Open Market Committee (FOMC) arrives at an interest rate decision today just as the market gets jittery over small banks.

Regional bank stocks suffered yesterday after the failure of First Republic Bank (NYSE:FRC) (FRC). Weakness in this sector slammed the Russell 2000® (RUT) small-cap index, which is heavily weighted toward banks. Beyond that, almost every sector finished in the red Tuesday.

Despite the bank worries, the FOMC is widely expected to raise rates another 25 basis points today. But what’s next? The Fed’s statement and Fed Chairman Jerome Powell’s comments are likely to suggest that the Fed will pause rate hikes to assess their cumulative impact on the economy, says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. Many questions in the press conference are likely to revolve around bank credit standards and how they impact the Fed’s decisions.

Powell might be asked about the debt ceiling, too, after Treasury Secretary Janet Yellen’s Monday comments on the chance of a June 1 default disheartened the market yesterday. Powell, however, can only sit and watch that debate, like the rest of us. Recent volatility in both stocks and fixed income may partly reflect growing concerns over that issue.

• The 10-year Treasury note yield (TNX) fell 4 basis points to 3.39%.
• The U.S. Dollar Index ($DXY) dropped to 101.56.
• The Cboe Volatility Index® (VIX) futures rose to 17.9.
• WTI Crude Oil (/CL) traded at $69.59 per barrel, down about $14 from its April high.

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VIX jumped more than 10% yesterday as stocks slid, while /CL plunged to its lowest level in five weeks. Recession fears continue to weigh on oil prices. The 10-year Treasury yield, meanwhile, has fallen nearly 20 basis points since early this week and the 2-year yield is back below 4%, signaling shakiness in the economy.

The ADP National Employment report out this morning showed a much stronger-than-expected 296,000 jobs created by the private sector in April, mainly in services-related work. Analysts had estimated 142,000, according to Trading Economics. However, wage growth slowed. Typically, the market doesn’t have a big reaction to the ADP report, and the report doesn’t tend to signal what’s ahead in the government’s Nonfarm Payrolls report due out Friday.

In its press release, ADP says, “The slowdown in pay growth gives the clearest signal of what’s going on in the labor market right now. Employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs.”

The probability of a 25-basis-point rate hike stands at 90.7% according to the CME FedWatch Tool. The FedWatch Tool now works in an 89% chance that the Fed will raise rates in May and then pause at the June meeting. There’s now just a 1% probability of another hike in June, according to the tool, down from nearly 14% a week ago. The market expects a pause.

Powell will take the podium shortly after the FOMC’s 2 p.m. ET announcement. Normally, investors look to him for guidance on what the Fed might do at its next meeting, but Powell may not be able to give much clarity due to the looming June 1 debt ceiling, says Liz Ann Sonders, chief investment strategist at Schwab. The Fed’s June meeting is June 13–14.

The debt ceiling isn’t the only “ceiling” in focus. A 25-basis-point hike today would take the fed funds rate to a range between 5% and 5.25%, which aligns with the Fed’s “terminal,” or peak, rate projection. That’s been a “ceiling” of sorts for investors since December, when the FOMC first raised the terminal rate to that level. It’s also above the level of core Personal Consumption Expenditures (PCE) price growth, the inflation metric most closely followed by the Fed.

While the terminal rate reflects a range of estimates from FOMC members—some expect a higher peak—and isn’t official, it likely would be another pain point for the market if Powell indicates rates could top that. Not only because of the possible impact, but also because of what it would say about the economy. Namely, that inflation remains untamed.

1-2-3: We get the FOMC today, Apple (NASDAQ:AAPL) (AAPL) earnings tomorrow, and the icing on the cake Friday with the April Nonfarm Payrolls report. Here’s what analysts expect from payrolls, according to Trading Economics:

• Job growth: 180,000, down from 236,000 in March.
• Wage growth: 0.3%, the same as March.
• Unemployment rate: 3.6%, up from 3.5% in March.
• Participation rate: 62.6%, unchanged from March.

Labor pains: Yesterday’s March Job Openings and Labor Turnover Survey (JOLTS) report showed openings at a two-year low near 9.6 million, below analysts’ expectations for 9.775 million and down from 9.931 million in February. Openings declined in transportation, warehousing, and utilities, the Bureau of Labor Statistics says. From a Fed perspective, the data might be a welcome sign of the labor market loosening a bit. Lower job availability tends to stifle wage inflation as workers compete for jobs instead of companies competing for workers.

China and claims updates: Tonight brings China’s Caixin Services PMI after a lighter-than-expected manufacturing PMI print earlier this week. Thursday morning we get U.S. weekly initial jobless claims, which fell unexpectedly the prior week. Analysts expect 245,000 new claims, according to Briefing.com.

Services check: The April Institute for Supply Management (ISM) Non-Manufacturing report for April is due out at 10 a.m. ET today. Consensus is for a headline figure of 51.9%, according to Briefing.com, up from 51.2% in March. Anything above 50 indicates expansion. The Fed’s been closely watching services inflation.

Earnings update: Markets played defense Tuesday, but earnings after the close summoned some optimism. In general, Q1 earnings have been far better than expected. However, concern surrounds guidance from companies that provide forecasts, as it hasn’t been extremely optimistic overall.

• Advanced Micro Devices (NASDAQ:AMD) (AMD): Shares fell in premarket trading despite the chipmaker beating Wall Street’s earnings and revenue expectations. Guidance and data center revenue both appeared to underwhelm investors. Shares have struggled over the last month as demand issues remain in focus.
• Ford (F): The automaker beat analysts’ expectations on top and bottom lines. Revenue easily exceeded Wall Street’s estimates. F reaffirmed guidance for each of its divisions, including a $3 billion loss in the electric vehicle (EV) division this year. Earnings came on the same day the company reported a price decrease on its Mustang Mach-E vehicle, following Tesla’s (TSLA) EV price cuts earlier this year. This has some analysts talking about an “EV price war,” which would be tough for F considering its EV division remains deeply in the red.
• Starbucks (NASDAQ:SBUX) (SBUX): Shares initially rose, then fell in premarket trading after the coffee vendor beat Wall Street’s estimates on revenue, earnings per share (EPS) and same-store sales in both North America and China. Store traffic in the United States surpassed pre-pandemic levels. Chinese sales bounced back as the country reopened. However, the company’s guidance appeared to disappoint investors.
• iPhones, Macs and more: Apple is often viewed as a bellwether for the global economy, and its stock represents roughly 6% of the S&P 500’s® (SPX) market capitalization. AAPL had a weak holiday quarter, missing analysts’ revenue and earnings estimates. Any surprises tomorrow—good or bad—could have an impact on the broader market. Analysts expect AAPL to post quarterly EPS of $1.43 on revenue of $92.96 billion. That compares with $1.52 and $97.28 billion a year earlier.