The stock market got little encouragement to sustain its rebound after the Federal Reserve signaled that interest rates will continue moving higher amid ongoing inflation concerns.

It’s not like the minutes from the latest Fed gathering brought a great deal of new information, but they certainly corroborated the idea that nothing will prevent officials from keeping rates higher for longer should economic resilience pose a threat to their goals. Now one thing to highlight is that while Chair Jerome Powell hasn’t been pushing back against easier financial conditions, Wednesday’s statement indicates they could warrant a “tighter stance.”

That all obviously means the Fed will be in no rush to cut rates. 

And that perception continued to be reflected in the swap market. Traders are now almost fully pricing in quarter-point increases at each of the Fed’s next three meetings. The rate on the June overnight index contract rose to 5.323 per cent, almost 75 basis points above the current effective fed funds rate. The market also priced in a higher eventual peak, with the July contract nearly reaching 5.4 per cent.

A number of officials said that an “insufficiently restrictive” policy stance could stall recent progress on moderating inflation pressures, according to the statement, suggesting they are prepared to move rates up further than their December forecast of 5.1 per cent. The minutes also said “almost all” officials agreed it was appropriate to raise interest rates by 25 basis points at the meeting, while “a few” favored or could have supported a bigger 50 basis-point hike.

“Bottom line is that many market headwinds aren’t going away and investors should expect volatility to stay as they parse over the impact rates being higher for longer will have,” said Mike Loewengart at Morgan Stanley Global Investment Office.

In the run-up to the Fed’s minutes, a Bloomberg survey of economists showed that inflation that’s proving increasingly stubborn will prompt the central bank to raise rates to an even higher peak level and hold them there through the year. Forecasters boosted their projections for the Fed’s preferred inflation gauge for every quarter through the first half of next year.

Aside from the Fed, traders kept an eye on some corporate highlights.

Apple Inc. has a moonshot-style project underway that dates back to the Steve Jobs era: noninvasive and continuous blood glucose monitoring, according to people familiar with the effort. Intel Corp. slashed its dividend payment to the lowest level in 16 years.

Traders pinned hopes on the earnings season to push the S&P 500 somewhere out of a trading range it’s been stuck in for months. Between JPMorgan Chase & Co.’s results that kicked off the announcement season and Walmart Inc.’s report Tuesday, the S&P 500 added 0.4 per cent. This ties for the smallest earnings-season reaction in either direction since 2018, data compiled by Bloomberg show.

SKEPTICISM

“After a strong start to the year driven by absolute and relative short covering by institutional investors, skepticism over the sustainability of the rally remains elevated, and bears are beginning to wrestle control from the bulls,” said Mark Hackett, chief of investment research at Nationwide. “While institutional investors have been net buyers this year, they remain conservatively positioned and quick to sell, while retail investors continue to aggressively buy equities.”

“This is a similar trend to what we saw through the second half of 2022,” he added.

Another thing traders are taking note is the recent flare-up in equity volatility. And the reason is that after a lengthy subdued period, that may put the S&P 500’s rally to the test. The so-called VIX held near its highest level since mid-December.

“There was some huge upside call buying activity on the VIX in February as traders turned bearish on the resilience of the equity market,” said Aurel’s Gurmit Kapoor.

That’s a stark contrast to data at the end of last month that showed very few were betting against the rally. Shares out on loan, an indication of short-selling interest, stood just below 1 per cent of the S&P 500’s median free float as of Jan. 31, according to figures compiled by S&P Global Market Intelligence.

As the Fed’s most-ambitious policy tightening in decades tests investors’ resolve toward equities, U.S. companies are increasingly relying on buybacks to boost their market valuation.

Companies in the S&P 500 bought back at least US$936 billion of shares in 2022, compared with the US$565 billion they paid out as dividends, according to estimates by Howard Silverblatt at S&P Dow Jones Indices. That’s the highest amount of buybacks since the turn of the millennium.

Geopolitical tensions also simmered on the background.

U.S. President Joe Biden said Russian President Vladimir Putin made a “big mistake” in suspending participation in the New START nuclear treaty, his first direct response to the announcement. Biden made the brief remark Wednesday in Warsaw, ahead of a meeting with a group of eastern-flank NATO allies known as the Bucharest Nine.

Meantime, Putin said he’s waiting for his Chinese counterpart Xi Jinping to visit Russia as he hailed deepening ties with Beijing at talks with China’s top diplomat.

Key events this week:

• Eurozone CPI, Thursday
• U.S. GDP, initial jobless claims, Thursday
• Atlanta Fed President Raphael Bostic speaks, Thursday
• BOJ governor-nominee Kazuo Ueda appears before Japan’s lower house, Friday
• U.S. PCE deflator, personal spending, new home sales, University of Michigan consumer sentiment, Friday
• Russia’s invasion of Ukraine hits the one-year mark, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index fell 0.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.3 per cent
• The euro fell 0.4 per cent to US$1.0603
• The British pound fell 0.6 per cent to US$1.2043
• The Japanese yen was little changed at 134.95 per dollar

Cryptocurrencies

• Bitcoin fell 1.5 per cent to US$23,826
• Ether fell 1.4 per cent to US$1,619.21

Bonds

• The yield on 10-year Treasuries declined three basis points to 3.92 per cent
• Germany’s 10-year yield was little changed at 2.52 per cent
• Britain’s 10-year yield declined one basis point to 3.60 per cent

Commodities

• West Texas Intermediate crude fell 3.2 per cent to US$73.89 a barrel
• Gold futures fell 0.5 per cent to US$1,833.90 an ounce