Fed Policy Statement Causes Market Decline, ECB to Increase Rates | Daily Market Analysis

Key events:

• New Zealand - RBNZ Gov Orr Speaks
• UK - Composite PMI (Apr)
• UK - Services PMI (Apr)
• Eurozone - Deposit Facility Rate (May)
• Eurozone - ECB Marginal Lending Facility
• Eurozone - ECB Monetary Policy Statement
• Eurozone - ECB Interest Rate Decision (May)
• USA - Initial Jobless Claims&nbsp
• Eurozone - ECB Press Conference
• Canada - Ivey PMI (Apr)
• Eurozone - ECB President Lagarde Speaks

Investors reacted negatively to the Fed's policy statement on Thursday, causing global stock markets to decline and the Japanese yen to rise. The troubles reported by PacWest Bancorp added to concerns about the health of some banks, despite regulators' assurances about containing the crisis that began with the collapse of Silicon Valley Bank and Signature Bank in March.

The Dow Jones Industrial Average dropped 0.8%, or 270 points, the Nasdaq fell 0.5%, and the  S&P 500 was down 0.7%.

The Federal Reserve increased interest rates by a quarter of a percentage point and indicated a possible pause in further increases to assess the fallout from the bank failures, await a political resolution to the US debt ceiling, and monitor inflation. Although investors initially welcomed the prospect of a pause, their confidence waned as Chair Jerome Powell spoke, stating that inflation remains the primary concern and that it is too early to declare with certainty that the rate-hike cycle has ended.

While inflation has shown signs of cooling, many worry about the upside threat that a strong labor market poses for inflation, particularly core services ex-housing inflation, which makes up the bulk of price pressures.

The most recent reading on core PCE, which is the Fed's preferred inflation measure and excludes volatile components of food and energy, slowed to 4.6% in March. But that is still well above the Fed’s 2% target, with FOMC reiterated that "inflation remains elevated."

The Fed, however, continued to warn that it will take time for its monetary policy measures to slow the economy, and bring down inflation.

The fastest pace of rate hikes seen in four decades appears now to be taking shape as pressures in parts of the economy including in regional banking and commercial real estate start to emerge.

Following the collapse of several regional banks including First Republic, many on Wall Street are looking out for further pressures in the sector that could trigger a sharp decline in lending activity and weigh on economic growth and inflation.

Alphabet (NASDAQ: GOOGL) gave up most of its gains and closed slightly higher than the flatline, while META (NASDAQ: META) and Apple (NASDAQ: AAPL) declined just one day before the latter's earnings release.

Apple is scheduled to announce its quarterly results after the closing bell on Thursday, with investors expected to closely watch for signs of iPhone demand amidst concerns about global economic growth.

Meta Platforms Inc faced regulatory pressure on Thursday after the Federal Trade Commission proposed a ban on Facebook from monetizing the data of children and teens under 18, alleging that the social media company violated a previous privacy order. This development weighed on Meta's stock price.

Meanwhile, during Thursday's Asian session, the price of gold experienced a sudden rise to reach a fresh record high at the $2,078-$2,079 region but then retraced to the lower end of its daily range due to some profit-taking. This pullback could also be attributed to the prevailing US dollar selling bias. The US dollar index (DXY), which measures the greenback against a basket of other currencies, has been drifting lower for three consecutive days and remains near the weekly low touched after the Federal Reserve's decision.

The European Central Bank is set to increase interest rates for the seventh consecutive meeting as it continues its prolonged fight against stubborn inflation. The central bank, which oversees a 20-country eurozone, has already raised rates by a record 350 basis points since July in an attempt to halt runaway price growth. However, achieving its target of bringing inflation down to 2% is still years away, leaving policymakers with little choice but to continue tightening policy. The most likely outcome is a 25 basis point increase, which would slow the pace after three straight 50 basis point hikes, but a larger increase is still possible. The deciding factor could be a compromise among policymakers on what signals to send about future increases. The conservative "hawks" who dominate the Governing Council are leaning towards a bigger increase, but they have indicated that they would accept a smaller move as long as the ECB indicates that May will not be the end of the tightening cycle, even as other central banks, such as the US Federal Reserve, approach their own interest rate peaks.