ANALYSIS: 50 BASIS POINT FED HIKE WOULD BE KNOCKOUT FOR US STOCKS
08:44 EDT 05/04
By Mark Pender
bondsonline.com
NEW YORK (MktNews) - The U.S. stock market has not priced in a 50 basis point interest rate hike at the May 16 Federal Reserve policy meeting and would likely fall very sharply if it gets one, as the market would see it as the end of an era.
Is 50 basis points possible? The stock market certainly hopes it isn't.
While expectations outside the stock market have built for a non-incremental 50 bp rate move since last week's release of strong gross domestic product and employment cost data, it wasn't until Wednesday, in a delayed awakening, that the bad word began to spread for stocks.
A look at the major averages shows the point. Including Wednesday's sharp 251 point loss, the Dow Industrials are down only 4.2% from the close prior to the GDP and ECI data. The Nasdaq Composite, based presumably on the principle that demand for technology is less cyclical, is down a quiet 2.1%, little more than noise for this index.
The morning after the GDP and ECI -- the first showing a first-quarter pace of 5.4%, far beyond the conventional 4% limit of sustainable growth, the latter at a first-quarter rate of 1.4%, an 11-year high -- dealers and analysts in the stock market held out hope that a quarter-point in June, forget about 50 points anytime, wasn't even in the cards.
When the 50-point worries for May finally did hit, the nearly as grim realization also set in that a quarter point in June is more than an outside chance. A Goldman Sachs retail sector downgrade, predicting lower second-half consumer spending, and the Fed's Beige Book, citing "intensifying" wage pressures, were presumably the cold water in the face. New York Fed President William McDonough, talking of imbalances and strains, didn't help either.
Though we know from the February minutes of the Federal Open Market Committee that a 50 basis point move has long been part of the Fed's discussion, until now it hasn't been part of the stock market's discussion. Why?
Explanations for the delayed reaction, the latest test of perfect information theories, perhaps center on a greater faith in technology-driven productivity, belief in the short-term unwinding of the wealth effect, and perhaps more important, on certainty that a big move would mark the end of an era.
Dealers and analysts had discarded the threat of a 50 point move as an out-of-character act of panic by the Federal Reserve, a move to be made, not based on subtleties of trend, but only in extreme emergency. Faith that Chairman Alan Greenspan would keep the hawks in line reinforced the skepticism.
One thing dealers and analysts all agree on is that a 50 point move, unless couched in the encouraging language of a one-time event, would trip severe losses across sectors including technologies. "A catastrophe," as First Albany strategist Hugh Johnson warns.
A final question: Will the prospect of a tumbling stock market, along with its political and economic consequences, actually influence the outcome of the May 16 meeting? The stock market certainly hopes so. |
