Bulls like hawks

The Federal Reserve kicked off its tightening cycle with an expected quarter-point hike and the stock and bond markets had different reactions. The FOMC hiked rates by a quarter-point. That was expected, but the summary of economic projections took what many saw as a hawkish tilt, with the median forecast for rates to end 2022 at 1.9%, up from 0.9% in December, and the majority of Fed officials looking for seven hikes this year. Officials see rates at 2.8% at the end of 2023, up from 1.6% at the previous Fed meeting.

Threading the needle: Stocks sold off right after the release of the statement and dot plot, with the S&P 500 (SP500) (NYSEARCA:SPY) dipping into negative territory. But they quickly resumed rally mode as Fed Chairman Jay Powell spoke, seemingly taking heart at him downplaying the possibility of recession.

"Asset markets treated the FOMC statement and projections as unambiguously hawkish on release but reacted more positively as the press conference progressed," Standard Chartered strategist Steve Englander wrote. "Powell’s mention that the balance-sheet drawdown may be worth an extra hike and comment on the easing of goods price inflation (however small) may have calmed market fears a bit. We think the Fed is probably pleased with this reaction," he said. "Equity markets closed higher, suggesting that investors saw the Fed stance as threading the needle between tolerating inflation and threatening a major downturn."

At the close, the S&P finished up more than 2%, with Nasdaq (COMP.IND) (NASDAQ:QQQ) up more than 3% and the Dow (DJI) (NYSEARCA:DIA) more than 1.5% higher. Stock index futures are slightly lower this morning. The S&P 500 is now up 4.4% in the last two sessions.

"Don't ignore blasts of strength like this," LPL Financial strategist Ryan Detrick said.

"Here are some other recent times stocks gained this much: Mar and Apr 2009, Aug 2011, Oct and Nov 2011, Dec 2014, Aug 2015, Dec 2018, Mar and Apr 2020," he tweeted. "These weren't times to be overly bearish going forward."

Notably, stocks are coming off a correction in the broader market and a bear market among growth names. But this looks like a vote of confidence from the equity market that, after admitting it is behind the curve, the Fed won't overreact and slam the brakes too hard. While Powell definitely came out with a hawkish message, the U.S. economy looks less vulnerable to shocks and a possible recession than other global economies, Goldman Sachs economist Steffan Ball said on Bloomberg.

Trouble with the curve: The Treasury market doesn't look too convinced that a soft landing is on the cards. Bonds followed a similar path as stocks yesterday afternoon, with prices plunging and yields spiking on the release of the statement, especially on the short end, then changing direction as Powell spoke. At the end of the press conference, the 2-year yield (NASDAQ:SHY) was up 5 basis points, while the 10-year yield (NYSEARCA:TBT) (NASDAQ:TLT) was lower. Still, that was further flattening of the yield curve and an inverted 2s-10s curve is generally considered a warning of an impending recession. The curve continues to flatten today, with the 2-year down 2 basis points to 1.95% and the 10-year down 3 basis points to 2.15%, putting the spread at 20 basis points.

That is "a remarkably flat curve for the very beginning of the rate hiking cycle," ING economists said. "The 2yr went into the meeting at quite an aggressive discount versus the funds rate anyway, one reminiscent of rate hike cycles that were typical before the great financial crisis, when 50bp hikes were not unusual," ING added.

On average, "it takes around three years from the first Fed hike to the recession," Deutsche Bank's Jim Reid said. "However the bad news is that all but one of the recessions inside 37 months (essentially three years) occurred when the 2s10s curve inverted before the hiking cycle ended. With all the recessions that started later than that, none of them had an inverted curve when the hiking cycle ended," he added. "In fact, hiking cycles that ended with the curve still in positive territory saw the next recession hit 53 months on average after the first rate hike, whereas the next recession for hiking cycles that ended with an inverted curve started on average in 23 months, so just under two years." (3 comments)

Berkshire at $500K

The coveted Berkshire Hathaway class A shares (NYSE:BRK.A) closed above half a million dollars apiece for the first time on Wednesday. The shares touched as high as $506,028.97 and closed at $504,036.00, up 1.2% for the day.

The company that holds a diverse collection of businesses from Dairy Queen fast-food restaurants to Geico auto insurance to Precision Castparts aerospace components now has a market cap of $735.9B, less than $100B from Tesla's (NASDAQ:TSLA) $843.5B. (45 comments)

Alibaba layoffs

Alibaba (BABA) and Tencent Holdings (OTCPK:TCEHY) are reportedly close to cutting thousands of jobs due to Beijing's ongoing regulatory crackdown on China's tech sector.

According to a report from Reuters, BABA is planning layoffs that could surpass 15% of the e-commerce giant's 39,000-person workforce. TCEHY is also on track to cut between 10% and 15% of its more than 94,000 employees, according to Reuters. (39 comments)

Ukraine crypto

Ukraine took a leap to make use of the decentralized marketplace after President Volodymyr Zelenskyy signed a bill into law that legalizes cryptocurrencies in the country.

Specifically, the law determines the legal status, classification, ownership and regulators of virtual assets, in addition to setting registration requirements for virtual asset services providers, the Ministry of Digital Transformation stated. (54 comments)

Robinhood stock lending

Robinhood Markets (HOOD) rose 15% after news that it's getting close to offering an option to let users loan out their stocks to other financial institutions, according to Bloomberg. The move would help it compete more directly with conventional brokerages like Fidelity Investments and Morgan Stanley's (MS) E*TRADE, and Charles Schwab (SCHW).

Code describing the service was discovered in a beta version of Robinhood's iPhone app by developer Steve Moser, who shared the information with Bloomberg. (5 comments)

Today's Markets

In Asia, Japan +3.5%. Hong Kong +7.1%. China +1.4%. India +2.0%.
In Europe, at midday, London -0.03%. Paris +0.2%. Frankfurt -0.14%.
Futures at 6:20, Dow -0.1%. S&P -0.2%. Nasdaq -0.3%. Crude +3.7% to $98.62. Gold +1.41% to $1936.60. Bitcoin +0.9% to $40,900.
Ten-year Treasury Yield -6.4 bps to 2.126%

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
8:30 Housing Starts and Permits
9:15 Industrial Production
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet