Daily market review

The major indices traded within narrow ranges until the highly anticipated FOMC decision and Federal Reserve Chair Powell's press conference. The FOMC voted unanimously to keep the target range for the fed funds rate unchanged at 5.00-5.25%. However, stocks initially declined when the Summary of Economic Projections revealed an upward adjustment in the 2023 median estimate for the fed funds rate to 5.60% from 5.10%.

The market started to rebound during Fed Chair Powell's press conference when he mentioned that the July meeting is a "live" meeting, implying that a policy change is possible but not predetermined. This signaled that a rate hike in July is not a certainty. With four more FOMC meetings scheduled this year, the market considered the possibility that the Fed may not raise rates as much as indicated in the dot-plot.

Mega-cap stocks helped the S&P 500 and Nasdaq close with gains, but there wasn't significant selling throughout the market. The Vanguard Mega Cap Growth ETF (MGK) rose 0.6%, while the Invesco S&P 500 Equal Weight ETF (RSP) fell by a modest 0.2%. The S&P 500 ended the session nearly unchanged from its pre-FOMC levels. However, the Dow Jones Industrial Average declined by 0.7%, primarily due to a significant loss in UnitedHealth (UNH) after the company issued a warning about rising costs. The Russell 2000 lagged behind the other indices, experiencing a 1.2% decline.

Market breadth showed a slight negative bias, with decliners outnumbering advancers by approximately a 5-to-3 margin at both the NYSE and the Nasdaq. Most S&P 500 sectors closed with losses, with energy and healthcare being the only sectors declining more than 1.0%. The information technology sector was the top performer, thanks to its mega-cap and semiconductor components.

In the bond market, the 2-year note yield remained unchanged at 4.70%, while the 10-year note yield fell by four basis points to 3.80% in a volatile trading session.

Regarding economic data, the weekly MBA Mortgage Applications Index rose by 7.2%, primarily driven by an 8.0% increase in purchase applications. The Producer Price Index for final demand declined by 0.3% in May, falling below expectations. However, the core PPI, which excludes food and energy, increased by 0.2% as expected. Wholesale inflation showed signs of moving in the right direction, which is positive for the Fed and provides some relief for corporate profit margins. Additionally, the weekly EIA crude oil inventories showed a build of 7.92 million barrels.

In summary, the market was digesting the FOMC decision and Powell's comments, with the Dow underperforming due to losses in UnitedHealth. The pleasing May Producer Price Index report, indicating improvements in wholesale inflation, was also being analyzed.

1. The Federal Reserve is expected to pause interest-rate hikes at the June meeting. Rate-hike decisions will likely be highly data dependent in the future.
2. U.S. equity markets remain at the highs of the year, with the S&P 500 up over 13% this year, led by the technology, communication services, and consumer discretionary sectors. Small-cap stocks have also shown signs of catching up, indicating a broadening in equity leadership.
3. Producer price index (PPI) inflation surprised to the downside in May. Lower input prices and normalization in global supply-chain pressures are expected to support corporate margins and keep pricing steady or lower.
4. The Federal Reserve meeting is highly anticipated, and markets are currently pricing in no rate hike at this meeting and potentially one more rate increase of 0.25% at the July meeting. The Fed is likely approaching the end of its tightening campaign, and lower inflation readings further support the expectation of the Fed stepping to the sidelines soon.
5. While risks may be skewed to the downside in the short term, the end of the Fed's tightening campaign and a potential pivot lower are expected to be supportive of longer-term returns in both equities and bonds.