On Wednesday, the Federal Reserve will issue its statement on its interest rate policy decision. Stock markets are pricing in rates to stay the same. Bond markets are not.
Which of the markets is right?
Stock markets are less likely to accurately forecast the FOMC decision. Instead of pricing in a rate pause, technology stocks are trading with caution. Semiconductor stocks like AMD (AMD), Marvell (MRVL), Western Digital (WDC), and Micron Technology (MU) gave up most of their recent gains.
Western Digital even posted strong quarterly results. Yet WDC stock traded lower in response to the report.
U.S. Treasury bonds behaved more like a haven to hedge the risky AI suppliers. Last week, yields on the U.S. 10-Year Treasury bond (IEF) fell back to the key 5.0% level. Investors thought bonds had peaked, only to watch the US10Y fluctuate in the 4.999% – 5.065% range.
Stock indices like the Nasdaq (QQQ) and Russell 2000 (IWM) might demonstrate high volatility after the rate decision on Wednesday afternoon. The small-cap index is more sensitive to rates. Their profit margins depend on changes in their borrowing costs.
Bank stocks might move up if rates are unchanged. Rates are not high enough to hurt the U.S. economy. Banks should post wider net interest income. Firms like Goldman Sachs (GS) and Morgan Stanley (MS) benefit from current rate levels. They attract growing customer deposits.
