With a Rate Hike Widely Expected Today, Market Awaits Hints From Fed on Next Steps

(Wednesday market open) The Federal Reserve wraps up its July meeting today, and the market widely expects a quarter-point rate increase—and wonders what’s next. There’s debate about whether this is the final hike or if the economy’s summer sizzle might warrant another.

Meanwhile, investors digest contrasting earnings reports from mega-caps Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) issued late Tuesday and await Meta Platforms’ (META) results this afternoon.

The Federal Open Market Committee (FOMC) concludes its meeting at 2 p.m. ET today, followed by a press conference featuring Fed Chairman Jerome Powell. His words often move the market, so perhaps prepare for some volatility when he begins speaking. Anyone trading might want to use extra caution.

• The 10-year Treasury note yield (TNX) dropped 2 basis points to 3.88%.
• The U.S. Dollar Index ($DXY) fell to 101.22.
• Cboe Volatility Index® (VIX) futures inched up to 14.01.
• WTI Crude Oil (/CL) eased to $78.89 per barrel.

A host of earnings hit the tape this morning. One highlight included Boeing (NYSE:BA), which saw shares rise more than 3% in premarket trading after posting a narrower-than-expected quarterly loss and reporting improved free cash flow due to strength in its commercial airliner business. Shares of Coca-Cola (NYSE:KO) also rose after an earnings beat.

So far this earnings season, 148 companies have reported, and 82% have beaten Wall Street’s earnings per share estimates—the highest percentage since Q2 of 2021 and above the 10-year average of 78%, according to Bloomberg. However, just 57% have beaten Wall Street’s average revenue estimate—the lowest since Q2 2019.

At a macro level, the light revenue results are consistent with the idea that inflation is rolling over. Many companies were reliant on that to boost their prices last year, and now they’re feeling the reverse effects, notes Kevin Gordon, a senior investment strategist at the Schwab Center for Financial Research.

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Microsoft and Alphabet shares went their separate ways after the two behemoths reported yesterday afternoon. Though they’re often lumped together as “big tech,” Alphabet is in the communication services sector.

Microsoft under cloud: Shares of Microsoft fell in premarket trading despite the company beating Wall Street’s average fiscal Q4 sales and earnings estimates. Revenue wasn’t as strong as some analysts had hoped, with cloud business growth slowing. Guidance also disappointed, falling short of Wall Street’s forecasts partly because of an anticipated slowdown in cloud revenue growth, and shares fell further during the company’s call as executives provided details of the financial outlook.

Closely watched Azure cloud services revenue rose 26%, down from 27% in the previous quarter. This, along with Microsoft’s overall 7% revenue growth that failed to reach double-digits after years of such gains, could suggest that corporate investment in information technology has eased after surging earlier this decade. Personal computer shipments dropped for the sixth quarter in a row for Microsoft, Bloomberg noted, eroding sales of Windows software and Surface devices.

Despite the stock’s poor response, some analysts called Microsoft’s quarterly performance “solid” and raised their price targets, saying the pressure reflects a breather from the recent rally and the company failing to meet high expectations.

Ads Lift GOOGL: Over at Alphabet, shares gained ground in premarket trading after the internet search business showed signs of an advertising recovery. Search advertising outpaced analysts’ expectations, perhaps signaling that the long slowdown in internet advertising might be loosening its grip. This could be welcome news for Meta as it prepares to report later today. Shares of Meta rose in premarket trading after Alphabet reported.

Meta keeps mega-cap earnings on the homepage after today’s close. Last time out, Meta’s executives warned of a “challenging regulatory environment” and a “volatile macro-environment.” Nevertheless, Meta reported a year-over-year revenue gain after three consecutive quarters of revenue declines, lifted in part by improving Facebook (NASDAQ:META) ad demand. Advertising apparently remains strong, Barron’s reported in late June.

Meta’s earnings could feature an update on the company’s cost-cutting efforts, which arguably helped lift the stock this year.

Futures trading indicates a nearly 100% probability that the FOMC will raise interest rates by 25 basis points at today’s meeting, according to the CME FedWatch Tool. The probability of another hike in September is 20%.

The question isn’t so much what the Fed will do today, but what it does from here. And that depends to some extent on whether a fed funds target range of 5.25% to 5.5% (if the FOMC hikes today) will be restrictive enough to reduce inflation to the Fed’s 2% target.

The market seems to believe it will, as futures prices build in rate cuts starting next spring. That would only be likely if inflation were on an obvious path back to 2%.

• However, core Personal Consumption Expenditure (PCE) prices rose 4.6% year-over-year in May—nowhere near the Fed’s 2% goal. This inflation meter, which the Fed watches closely and gets updated for June on Friday, has been “sticky” at 4.6% to 4.7% most of the year.
• Fed officials believe this stickiness reflects solid consumer spending, especially on services like airline tickets, restaurants, hotels that boomed post-pandemic. Healthy wages and low unemployment fuel this spending. Yesterday’s July Consumer Confidence reading from the Conference Board reached 117—the highest in two years—suggesting that spending could remain aggressive.
• Still, there are signs of credit tightening, especially for small businesses that employ nearly 50% of the U.S. workforce. Delinquencies are rising on auto and credit card loans, notes Kathy Jones, Schwab’s chief fixed income strategist. This could point toward cooling, but it’s unclear whether it will squelch inflation enough for the Fed.
• The European Central Bank (ECB) and Bank of Japan (BOJ) also meet this week. The ECB is seen raising rates by another quarter-point, according to a Reuters survey of analysts, but the BOJ is expected to keep its policy unchanged.

Home front: June New Home Sales are due out after the open today. Analysts expect the sales pace to cool in June to a seasonally adjusted annual rate of 722,000, down from 763,000 in May, according to Briefing.com.

Something domestic: Q2 Gross Domestic Product (GDP) is due out tomorrow before the open and offers the government’s first estimate of spring economic growth after a 2% annual gain in Q1. Consensus is for a slight pullback to 1.8% in Q2, according to Trading Economics. Remember, though, that the government surprised investors with its third and final Q1 estimate, which was well above the prior estimate of 1.3%. Healthy consumer spending helped fuel the gain.

That’s no guarantee we’ll get an upside surprise. But if one does come, it could raise further questions about whether the Fed’s been sufficiently restrictive. Even 2% GDP growth is arguably on the high side considering the Fed’s 500 basis points of rate increases over the last 16 months.