Dow off 200 points but Nasdaq nears record as stock-market investors gear up for Fed update

The Fed’s two-day meeting commences Tuesday.

How is the stock market trading?

• The Dow Jones Industrial Average DJIA, -0.69% was trading 213 points, or 0.6%, lower at about 34,264.
• The S&P 500 index SPX, -0.25% declined 10 points, or 0.2%, to around 4,237.
• The Nasdaq Composite Index COMP, +0.39% rose 41 points to reach roughly 14,110, for a gain of 0.3%, closing in on the April 26 record closing high at 14,138.78.

On Friday, the Dow retreated 0.8% for the week, snapping a 2-week win streak, but off 0.86% from its May 7 record closing high at 34,777.76. The S&P 500 advanced 0.4% for the week to mark its 28th record close of 2021, the Nasdaq Composite Index ended the week with a 1.9% gain.

What’s driving the market?

What once proved illusory for the Fed years ago may now be transitory, and now it is time to talk about talking about inflation.

By the middle of the week, investors may finally have a clearer sense of the U.S. central bank’s game plan for confronting inflation and normalizing policy, if they deem pricing pressures temporary.

Read: Here’s what the market wants—and doesn’t want—to hear from Powell at this week’s Fed meeting

“Wednesday’s statement from the Federal Reserve isn’t expected to feature any fireworks, but it is an important meeting as it will offer clues about the reaction function of the central bank to rising inflation,” wrote Neil Wilson, chief market analyst at Markets.com. “We know the Fed is happy to let inflation run a little hot over the summer as it pins everything on its employment mandate,” the analyst said.

Presently, the U.S. central bank is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities each month, while keeping benchmark interest rates between 0% and 0.25%.

Federal Reserve Chairman Jerome Powell and fellow policy makers are expected to discuss the eventual tapering the size of that $120 billion a month asset-purchase program, which could prove delicate as they hope to avoid roiling the market in the process. 

It is expected that the Fed’s projections of interest rates in the future, the so-called dot-plot, may show a shift forward for the first rate increase to come during 2023. At the moment, the Fed shows no rate increases until 2024 at the earliest. Back in March, the Fed penciled in a 2.2% core rate for the personal consumption expenditure index. While that may rise, the Fed won’t move the core rate for 2022 much higher, a signal that it still believes the price gains seen in the past few months reflects “largely transitory” factors. 

“Though inflation concerns appear to have moderated, we expect volatility to spike around further data indicating accelerating wage growth and/or prices,” wrote Saira Malik , chief investment officer at Nuveen, in a note.

“Should price increases begin to spread beyond their current narrow scope, or if employers continue to hike pay to attract or retain workers, the Fed may feel the need to more openly discussing tapering,” she wrote.

Meanwhile, leaders of the Group of Seven championed a 15% global minimum tax rate support, as well as continued fiscal stimulus to help economies dig out of the COVID pandemic.

Which companies are in focus?

• Novavax Inc.’s NVAX, -0.42% experimental COVID-19 vaccine was 90.4% effective at preventing symptomatic disease in adults in a large clinical trial, the company said, results that move the shot a step closer to global use. Shares were up 0.6%.
• Meme stocks AMC Entertainment Holdings Inc. AMC, +16.09% and GameStop Corp. GME, -3.88% were trading mixed. Shares of movie chain AMC were up over 6% and those for bricks-and-mortar videogame retailer GameStop were down over 3%.
• Shares of Lordstown Motors Corp. RIDE, -17.42% were down over 20% after the company said that it was replacing its chief executive and chief financial officers.

How are other assets faring?

• The yield on the 10-year Treasury note TMUBMUSD10Y edged up to 1.472%. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, declined 0.1%.
• Oil futures traded at a more than 2-year high, with the U.S. benchmark CL00, up 61 cents, or 0.9%, at $71.52 a barrel. Gold futures GC00 were lower, falling 1.5%, to $1,851.60 an ounce.
• European equities edged higher, with the pan-Continental Stoxx Europe 600 SXXP, closing up 0.3%. London’s FTSE 100 UKX, also gained almost 0.3%.
• In Asia, the Shanghai Composite SHCOMP and Hong Kong’s Hang Seng Index HSI were closed for a holiday; Japan’s Nikkei 225 NIK, rose 0.7%.