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Stocks drop as Powell sees no 'strong case' for rate cut or hike

U.S. stocks ended a choppy session lower on Wednesday as investors reacted to the Federal Reserve’s widely expected decision to keep interest rates on hold.

The S&P 500 (^GSPC) fell 0.75%, or 22.1 points, as of market close, reverting to a trend seen last year, in which the large-cap index ended the session lower after each of Fed Chairman Jerome Powell’s press conferences in 2018. The Dow (^DJI) fell 0.61%, or 162.77 points, while the Nasdaq (^IXIC) declined 0.57%, or 45.75 points, as of market close Wednesday.

Stocks were initially higher following the release of the central bank’s latest monetary policy statement Wednesday afternoon, in which the Fed kept benchmark rates unchanged at between 2.25% and 2.5%.

However, U.S. equities began to dip into the red after Powell suggested during a subsequent press conference that the central bank does not see a “strong case” for either a hike or cut as the next move for shifting benchmark interest rates. The statement essentially erased hopes for a near-term cut to the target range for borrowing costs – an outcome markets had priced in given consistently low inflationary signals.

The Fed had previously telegraphed that there would be no interest rate hikes this year, and in its statement on Wednesday reiterated it would be patient in the face of moderating growth and low price pressures.

The decision came a day after President Donald Trump urged the central bank to cut rates, and usher in a new era of quantitative easing to backstop growth.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the [FOMC] will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective,” the Fed said in its statement.

2019 Berkshire Hathaway Annual Shareholders Meeting

In particular, investors were looking for Powell during his press conference to provide an update on the central bank’s inflation outlook, given the recent phenomenon of persistently below-target inflationary signals in the U.S. economy despite low unemployment rates. Typically, the two are inversely correlated.

On Tuesday, Powell suggested that the below-target inflation was caused by “transitory” conditions including portfolio management services and lower apparel and airfare prices. He also declined to provide an inflationary level at which an interest rate cut would be justified.

Through March, the year-over-year pace for core personal consumption expenditures (PCE) – the Fed’s preferred inflation metric – was 1.6%, and the core PCE reading for the first quarter of 2019 came in at just 1.3% quarter-over-quarter. The Fed has been challenged to keep the core reading near a 2% target, a level Powell said the central bank is “strongly committed” to achieving.

“While the Fed statement now flags that core inflation is running below 2%, it also acknowledges that the economy has been stronger than the Fed expected before,” Brian Coulton, chief economist at Fitch Ratings, said in an email. “So it’s hard to see this as a decisively more dovish announcement.”

Further signs of a consistently strong labor market came earlier in the day Wednesday, with ADP/Moody’s national employment report showing that private sector employment rose by 275,000 jobs in April, or much higher than the 180,000 new positions expected.

Good Apple

Meanwhile, a jump in Apple’s stock (AAPL) provided a boost to the three major indices earlier during Wednesday’s session after the big tech company posted better-than-expected March quarter results and guidance for its fiscal third quarter. Shares of Apple suppliers, including Qualcomm (QCOM), Micron Technology (MU) and Cirrus Logic (CRUS), also outperformed the broader market Wednesday morning after Apple’s earnings beat.

Apple’s management indicated that a slowdown in iPhone sales that plagued the company at the end of 2018 has since stabilized. Service segment sales jumped 16% to a new quarterly record of $11.5 billion, consistent with the company’s new plans to expand Services offerings to offset slowing hardware sales growth.

CEO Tim Cook also provided a sunnier outlook for the company’s sales in China, which declined by just 22% year-over-year in the fiscal second quarter, from a 26% drop in the first quarter.

Cooks comments on China, a geographical comprising about 18% of total second-quarter sales, detailed an improving economic picture for the world’s second largest economy, with signals of a stronger Chinese consumer helping to deflect concerns of a global economic slowdown that had been on the minds of investors since the start of the year.

Shoppers pass by the Apple store logo at a shopping mall in Beijing, China. (AP Photo/Ng Han Guan, File)

Apple has executed some price cuts in order to help boost demand in China, but Cook maintained that “there are two other items that are not insignificant in China that I don’t want to lose.”

“The one that got the most visibility – and that happened in early April – was the VAT reduction from 16% to 13%. So it’s a very aggressive move, and there are other stimulus programs as well that likely have an effect at the consumer level,” he said.

“And then finally, and this is not to be underweighted either, I think the improved trade dialogue between the countries affects consumer confidence in a positive way,” Cook said.

China and the U.S. held trade talks in Beijing on Wednesday that U.S. Treasury Secretary Steven Mnuchin characterized as “productive.” Next week, Chinese Vice Premier Liu He will travel to Washington, D.C., for another round of talks as the two sides attempt to work out a trade deal.

Economy

The Institute of Supply Management’s April reading for economic activity in the U.S. manufacturing sector came in lower-than-expected at 52.8, versus 55 expected. Readings above 50 indicate expansion in a sector. This marks the lowest reading since October 2016. The private survey saw decreases in its subindexes of new orders, production and employment.

Separately, the Commerce Department reported Wednesday that construction spending decreased 0.9% in March as both private and public constructions projects declined. Consensus economists anticipated a flat reading for March, following three previous months of advances.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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