The main equity indexes were moving sideways through midday on Wednesday, as markets awaited word from the new leader of the world’s most important central bank about inflation, interest rates and economic growth. All three fell sharply following the release of the first FOMC policy statement under the leadership of new Fed Chair Kevin Warsh.
Maybe it’s a little too simple, maybe it’s not when the new chair is as loudly committed to keeping a tighter lid on Fed communications as this one is, but the Federal Open Market Committee used 344 words to announce a historically split decision following its April meeting, the final one under Jerome Powell’s leadership.
Today, the FOMC approved a 132-word statement to announce a unanimous 12-0 decision to hold the target range for the federal funds rate steady at 3.50% to 3.75% “in support of the Federal Reserve’s dual mandate.” The FOMC also “reaffirmed its policy of maintaining ample reserves in the banking system.”
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Economic growth is solid “despite elevated uncertainty that owes, in part, to the conflict in the Middle East,” with strength in productivity and capital investment. Job growth is keeping up with labor force growth, and the unemployment rate is steady.
Noting that inflation is above the Fed’s 2% target “in part reflecting supply shocks that have driven price increases in certain sectors, including energy,” the Warsh Fed delivered a terse conclusion: “The Committee will deliver price stability.”
You can catch up on news and developments around the FOMC meeting at our June Fed meeting live blog.
Will the Fed raise the federal funds rate?
Market-based interest rates were up across the maturity spectrum, with the 2-year Treasury yield, widely watched as a gauge of short-term policy, rising to 4.216% from 4.047% on Tuesday.
CME FedWatch, which tracks the probability of rate cuts and rate hikes based on 30-day fed funds futures prices, indicates the Warsh Fed could raise interest rates as soon as October.
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Continuing uncertainty about the details of a memorandum of understanding between the U.S. and Iran that would open the Strait of Hormuz lifted the front-month West Texas Intermediate crude oil futures contract by 0.3% to $75.49 per barrel.
By the closing bell, the blue-chip Dow Jones Industrial Average had declined by 1% to 51,493, despite reaching another new all-time high on an intraday basis. The broad-based S&P 500 was down 1.2% at 7,420, and the tech-heavy Nasdaq Composite was off 1.3% at 26,021.
AVGO is an ‘aggressive buy’
Broadcom (AVGO, +4.3%) led a rally for semiconductor stocks after Morgan Stanley analysts Harlan Sur and Mayur Ramdhani reiterated their Overweight (Buy) rating and said they’d be “aggressive buyers at current levels.”
Indeed, the analysts see potential upside of 47.6% from AVGO’s closing price on Wednesday based on their 12-month target price of $580. And it’ll get there because of its “significant dominance” in advanced chip packaging and design.
Sur and Ramdhani note that Broadcom has helped Alphabet’s (GOOGL, -2.5%) Google unit develop 14 advanced chips during a decade-long partnership, though markets have questioned the durability of that arrangement given Alphabet’s ambitions to take chipmaking in-house.
AVGO was down 21.8% from its all-time closing high of $481.57 on June 2 through June 16, trimming its year-to-date gain to 9.1%. But Broadcom’s trailing-12-month return is back well above 50% after today’s price action.
Did a defensive stock take a SPCX hit?
Verizon Communications (VZ, -1.8%) is one of the best defensive stocks amid elevated uncertainty, but it does face rising competitive pressure from one of the hottest names in the market: SpaceX (SPCX, -5.0%).
UBS analyst John Hodulik framed the problem at a conference in December in a three-part question to CEO Greg Sankey of Verizon’s “terrestrial” mobile service peer AT&T (T, -3.0%) about “low Earth orbit” service providers.
“Do you see LEO infrastructure as a complement or a substitute to terrestrial networks? How do you expect the business model of the LEO providers to evolve over time? And is it something that we should worry about as terrestrial mobile investors?”
AT&T and Verizon aren’t staying Earth-bound, but they are using AST SpaceMobile (ASTS, +3.9%) rather than SpaceX unit Starlink to pursue their extraterrestrial ambitions. And AST lacks launched satellite capacity right now.
Hodulik reiterated his Neutral (Hold) rating on VZ stock and a $48 12-month target price after management introduced new service and device plans on June 15, as well as a loyalty program focused on customer retention.
Verizon expects the plans and the program “to be accretive to revenue and EBITDA growth and drive continued churn reduction.” Management also confirmed its full-year financial guidance.
SPCX stock, meanwhile, had its first down day as a publicly traded company, three trading sessions after it debuted with the biggest IPO ever.
