Hawkish Fed may damp stock rally, says Morgan Stanley

BLOOMBERG

Stock market investors holding on to hopes that the Federal Reserve will cut rates in the second half could be disappointed later this week, according to Morgan Stanley’s Michael Wilson — a staunch Wall Street bear.
The US central bank is expected to hike interest rates on May 3, marking the 10th consecutive increase going back to March 2022. “If the message delivered at this meeting is more hawkish, it could provide a near-term negative surprise for equities,” Wilson wrote in a note.
Bond market expectations for rate cuts could be re-priced to a path that’s more in line with Morgan Stanley economists’ view for a pause later this year if Fed Chair Jerome Powell’s remarks warrant it, according to Wilson.
“That could ultimately be a negative surprise for equities, particularly given the upside in index price we’ve seen into the Federal Open Market Committee (FOMC) and the fact that this meeting is one of the least talked about in recent memory,” said Wilson, who was ranked No 1 in last year’s Institutional Investor survey after correctly predicting the selloff in stocks in 2022.
The benchmark S&P 500 has climbed over the past two months even amid banking sector turmoil and recession concerns, as investors take comfort in better-than-feared earnings and expect any slowdown to be mild. Still, Wilson said hopes of a profit recovery in the second half of this year and throughout 2024 are overdone. US stock futures were steady after the S&P 500 and Nasdaq 100 gained.
Over at Goldman Sachs Group Inc, chief US equity strategist David Kostin said that even though this week will likely mark the end of the Fed hiking campaign, which was historically positive for stocks, the conclusion of this cycle may differ from the historical pattern.
“Rising valuations typically drive equity rallies at the end of hiking cycles, but the S&P 500 is already trading well above the multiple at the end of any cycle except the one ending in 2000, after which the S&P 500 declined despite the Fed pause,” Kostin said.
Meanwhile, contracts for the S&P 500 slipped 0.1%, after a 0.8% jump for the index to cap a weekly gain as well as back-to-back monthly advances. Contracts for tech-heavy Nasdaq 100 also fell 0.1%. Trading was closed in many major European and Asian markets for a holiday.
Shares in First Republic bank tumbled 44% in premarket trading. Regulators had worked in Washington before announcing the lender will be acquired by JPMorgan, after rescue efforts failed to undo the damage from wrong-way investments and depositor runs that have roiled regional lenders.
Treasuries fell slightly after a rally. Australian and New Zealand 10-year notes were flat. The yen weakened while the greenback and the Australian dollar strengthened. A sudden drop for Bitcoin dragged the cryptocurrency further below $30,000 after a stellar run this year.
Earlier, Japan’s Topix benchmark rose 1% to close at the highest level since September 2021 with all sectors advancing. Australian shares also rose. Apple Inc headlines another busy week of earnings that includes Advanced Micro Devices Inc and Ford Motor Co.