The world’s biggest bond market surged as Jerome Powell downplayed the possibility of rate hikes and the Federal Reserve said it will shrink its balance sheet at a slower pace to ease strains in money markets.

Treasuries climbed across the curve, with two-year yields dropping below 5 per cent. Swap traders boosted their bets on rate cuts and projected higher odds that the first move will happen in November, instead of December. The S&P 500 finished lower — after gaining over 1 per cent during Powell’s press conference — as chipmakers plunged in the final hour of U.S. trading.

“Jay Powell threaded the needle perfectly today,” said Ronald Temple at Lazard. “He did not take the bait to talk about hiking rates — but clearly communicated instead that the question is about when, not if, inflation will resume its decline.”

Fed officials decided to leave the benchmark rate in a range of 5.25 per cent to 5.5 per cent for a sixth straight meeting. Officials also outlined plans to slow the pace at which the central bank is shrinking its asset portfolio. The Fed will cut the cap on runoff for Treasuries to US$25 billion a month from $60 billion beginning in June.

In a volatile session, the S&P 500 extended this week’s losses. In late hours, Qualcomm Inc., the world’s biggest seller of smartphone processors, gave a solid forecast for the current period.

Wall Street’s Reaction to Fed Decision:

• Krishna Guha at Evercore:
  • The basic message was that cuts have been delayed — not derailed.
  • It was not one-way dovish – Powell did indicate that he is open to the possibility that there will be no cuts this year.
  • But relative to expectations, this is a very measured hawkish reset, consistent with the idea that the (thin) base case is still two cuts starting by September, though a longer delay to December or beyond is still very possible depending on how the economy evolves.
• Sonu Varghese at Carson Group:
  • Powell repeatedly refused to entertain the idea of more rate hikes from here and swatted away the idea of stagflation, pointing out that inflation has eased a lot and the unemployment rate is really low. In his view, he thinks inflation will continue to ease, so the next likely move by the Fed will be a rate cut once they get enough confidence that inflation is headed to 2 per cent.
  • The fact that inflation remains elevated means we’re not going to see rate cuts very soon. At the same time, they are going to slow the pace at which they shrink their balance sheet (their massive bond portfolio), which will likely put less upward pressure on bond yields.
• Chris Zaccarelli at Independent Advisor Alliance:
  • Not only did Powell choose not to give a hawkish press conference, he took great pains to be dovish. At every turn, he looked on the bright side of data – from higher-than-expected inflation to recent lower-than-expected economic growth – and dismissed any suggestions that the Fed was pivoting from rate cuts to rate hikes.
• Jack McIntyre at Brandywine Global:
  • There was a collective sigh of relief in the financial markets after the Fed refrained from increasing its hawkishness.
  • The only surprise came on the quantitative tightening side of policy by cutting the pace of reduction in U.S. Treasuries. This adjustment doesn’t mean QT is ending anytime soon, only that a smoother ride is likely.
• Josh Jamner at ClearBridge Investments:
  • Powell struck a clearly dovish tone during the FOMC press conference today — which sparked a rally in risk assets as many investors were positioned for and fearful of a more hawkish bent after a string of hot inflation prints so far this year.
  • Powell stated that the Fed was “prepared” to cut rates “if the labor market weakens”, while hinting repeatedly at a higher bar for a rate hike and that it was “unlikely the next move is a hike” while reiterating the view that monetary policy is sufficiently restrictive to bring inflation back to the 2 per cent target over time.
  • This leaves the Fed in wait and see mode after inflation has come in higher than they expected so far in 2024, meaning it will take “longer than previously expected to gain confidence” that inflation is on track to return to 2 per cent, which has been the barometer Powell outlined the committee is looking for in order to cut rates … simply put, higher for longer is alive and well.
• Neil Dutta at Renaissance Macro Research:
  • The statement retains its easing bias. In the press conference, Powell believes that policy is restrictive. If policy is restrictive, they are more concerned about downside growth risks than upside inflation risks.
• Bret Kenwell at eToro:
  • The Fed might not be confident enough to cut rates yet, but notably, the idea of rate hikes doesn’t appear to be on the table. While the discussion of rate hikes has gained traction lately, the market has not priced in that scenario in a meaningful way.
  • The Fed’s plan to slow its balance sheet runoff should be a positive for the bond market, and it’s something the committee likely wouldn’t do if it felt that it would need to raise rates in the not-too-distant future. With rate hikes off the table, that should be a positive for stocks and bonds. So should the idea that Chair Powell doesn’t see stagflation as a risk right now.
  • It appears the Fed remains in a “when, not if” outlook for when it comes to rate cuts — they just need the data to justify it. The Fed believes its policy is restrictive enough to get inflation to its goal, it’s just a question of how long it will take.
• Seema Shah at Principal Asset Management:
  • Inflation surprises have dampened only some of Powell’s spirit. After a spate of strong inflation numbers, the Fed cannot pretend that recent inflation surprises are simple blips in the data run. Yet Powell retains some confidence that inflation will decline from here, albeit lessened over recent months, suggesting that it’s a fairly high bar for rate hikes. 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. The next few months of data are pivotal for the Fed path.
• Quincy Krosby at LPL Financial:
  • The FOMC statement offered the market liquidity, with a larger than expected QT slowdown in exchange for more time needed to assess the path of disinflation and timing for initiating  rate cuts.
  • This was - at the margin - a more dovish FOMC statement and the reaction in markets, both equity and Treasury yields reflect the Fed’s message that they need more data before an initial rate cut.
  • The statement wasn’t as hawkish as market participants anticipated as there wasn’t a hint of a potential rate hike, just a suggestion of remaining higher for perhaps longer than an eager market is comfortable with.
• Ian Lyngen at BMO Capital Markets:
  • The FOMC statement was more about QT tapering than anything on the policy front.
  • We’ll note that the 2 per cent inflation objective and the Fed’s commitment to the target is now in the statement four times (once in the first paragraph, once in the second, and twice in the third). We’re cognizant that some in the market continue to believe the Fed should revisit the target, but the Committee’s messaging on this topic has been extremely clear; and was reiterated by today’s statement to be sure. 
• Chris Low at FHN Financial:
  • It cut the run-off rate of its Treasury portfolio, however, from $60bn a month to $25bn, a bigger reduction than the $30bn expected. The run-off rate of the mortgage-backed portfolio was unchanged at $35bn, partly because the Fed would like to shift the balance of holdings toward Treasuries and partly because there is so little refinancing these days the pace is well below the cap anyway.
  • The slowdown in portfolio roll-off is not intended to indicate normalization will end soon or to reduce the effect of quantitative tightening. Instead, the Fed hopes to avoid creating market turmoil so the balance sheet can be shrunk more than would be possible if it proceeded more quickly.
• Greg McBride at Bankrate:
  • The Fed indicated it will slow the pace of Treasuries rolling off its balance sheet by $25 billion each month beginning in June. The less Treasury debt that rolls off the Fed’s balance sheet, the less debt that has to be absorbed by the market. This could help keep long-term Treasury yields in check after heady increases thus far in 2024.
  • Whitney Watson at Goldman Sachs Asset Management:
  • U.S. growth and inflation exceptionalism in the first quarter suggest the Fed will exercise patience before pivoting to rate cuts, spending the second quarter regaining confidence on disinflation. We expect the downtrend in inflation has been delayed, not derailed. As for the Fed’s balance-sheet reduction, today’s decision to taper quantitative tightening is a nod to liquidity considerations in the financial system, rather than a shift in direction.
• Steve Sosnick at Interactive Brokers:
  • Pulling back on QT is the noteworthy aspect, particularly because cutback is strictly on the Treasuries side while agencies and mortgages remain unchanged. A bit of dovishness to balance the acknowledgement of lack of progress on inflation.

Wall Street lore says traders should dump stocks in May to avoid the summer doldrums. But that strategy appears to have been a bust in recent memory.

The old Wall Street adage “sell in May and go away” refers to a six-month stretch from May to October that historically has been the worst time to own stocks — but that hasn’t been the case lately. In fact, the S&P 500 has delivered gains in eight of the past 10 years during this time frame, with an average return of 4 per cent, data compiled by Bloomberg show.

That said, this span still hasn’t beaten the best six months of the year on average for U.S. equities in the past 70 years: November to April.

Last month’s slide in the S&P 500 drove sell-side strategists out of equities and bonds and into cash, bringing a contrarian sentiment barometer from Bank of America Corp. closer to signaling it’s time to buy U.S. stocks.

BofA’s so-called Sell-Side Indicator ticked down 33 basis points in April to 54.6 per cent, bringing it just below its 15-year average, strategists led by Savita Subramanian wrote in a note to clients Wednesday.

Corporate Highlights:

• Amazon.com Inc.’s cloud unit posted the strongest sales growth in a year, a sign that the retailer’s most profitable unit is recovering from a slump as businesses resume spending on technology projects, including artificial intelligence services.
• Advanced Micro Devices Inc., the second-biggest maker of computer processors, gave a lukewarm revenue forecast for the current period, weighed down by lackluster demand for chips used in video-game hardware.
• Super Micro Computer Inc. reported quarterly sales that fell slightly short of estimates. The results disappointed investors who had sky-high expectations that the server maker’s business would benefit from AI-related demand.
• Mastercard Inc. cut a forecast for full-year revenue growth citing foreign exchange headwinds, as first-quarter spending on the payments giant’s network fell short of estimates.
• New York Community Bancorp Inc. posted results that were better than feared and executives outlined a plan for reshaping it into a more diversified and profitable bank.
• Estée Lauder Cos. lowered its revenue outlook for the remainder of the year as the company faces lackluster demand for its high-end products in China.
• Pinterest Inc. reported first-quarter sales and user growth that surpassed Wall Street’s expectations, bolstered by a push into shopping and a focus on Gen-Z users.
• Starbucks Corp. sales fell for the first time since 2020 as half-off deals and new lavender lattes weren’t enough to entice increasingly budget-conscious consumers.
• Pfizer Inc. raised full-year earnings guidance after completing its deal with the U.S. government to take doses of its Covid pill back.
• CVS Health Corp. cut its annual earnings outlook for the second quarter in a row, citing increased medical costs in its Medicare insurance business.
• Johnson & Johnson will ask thousands of people suing over its allegedly tainted baby powder to vote for a settlement that would resolve all litigation for $11 billion — $2.1 billion more than the company offered last year.

Key events this week:

• Eurozone S&P Global Manufacturing PMI, Thursday
• U.S. factory orders, initial jobless claims, trade, Thursday
• Apple earnings, Thursday
• Eurozone unemployment, Friday
• U.S. unemployment, nonfarm payrolls, ISM Services, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.7 per cent
• The Dow Jones Industrial Average rose 0.2 per cent
• The MSCI World index fell 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.2 per cent to $1.0689
• The British pound was little changed at $1.2491
• The Japanese yen rose 0.2 per cent to 157.51 per dollar

Cryptocurrencies

• Bitcoin fell 4.7 per cent to $57,030.77
• Ether fell 1.3 per cent to $2,924.73

Bonds

• The yield on 10-year Treasuries declined five basis points to 4.63 per cent
• Germany’s 10-year yield advanced five basis points to 2.58 per cent
• Britain’s 10-year yield advanced two basis points to 4.37 per cent

Commodities

• West Texas Intermediate crude fell 3.4 per cent to $79.11 a barrel
• Spot gold rose 1 per cent to $2,308.04 an ounce