Dow ends higher as investors weigh AI hopes and await Fed rate-policy meeting

Dow ends higher as investors weigh AI hopes and await Fed rate-policy meeting

MARKET SNAPSHOT

U.S. stocks finished higher Monday — snapping a three-day losing streak for the S&P 500 and Nasdaq Composite — as investors awaited a Federal Reserve meeting this week that’s expected to shed light on prospects for rate cuts later this year.

What happened

• The Dow Jones Industrial Average rose 75.66 points, or 0.2%, to end at 38,790.43.
• The S&P 500 gained 32.33 points, or 0.6%, to finish at 5,149.42.
• The Nasdaq Composite closed at 16,103.45, up 130.27 points, or 0.8%.

The major indexes traded in tight ranges Monday and ended near session lows.

Market movers

Investors this week are focused on two key central-bank meetings — with the Bank of Japan seen as likely to end its negative-interest-rate policy on Tuesday, while on Wednesday the U.S. Federal Reserve could reduce its projection for interest-rate cuts this year.

See: Why Bank of Japan may shake up financial markets before Fed’s next interest-rate decision

“No one expects a rate cut on Wednesday, but after last week’s double-dose of hot inflation data, everyone will be wondering whether the Fed is rethinking a June cut,” said Chris Larkin, managing director for trading and investing at E-Trade from Morgan Stanley.

The February consumer-price index and producer-price index both came in hotter than expected last week. The S&P 500 suffered its first back-to-back weekly losses last week, but also hit a record high for the ninth week in a row, Larkin noted.

To continue the record streak, “the market will need to like what it sees in the Fed’s statement on Wednesday, and get confirmation from [Fed Chair] Jerome Powell that two months of sticky inflation numbers won’t derail the Fed’s game plan,” Larkin said.

Doubts are emerging in the short-term interest-rates market. As of Monday afternoon, overnight index swaps contracts were trading at levels that implied a 48.1% chance of a June rate cut, down from 65.3% on March 8.

Fed-funds futures have also priced in a lower probability of a June rate cut, but still see prospects of such a move as slightly better than 50-50, according to the CME FedWatch Tool.

Read: Stock market to face reality check when Fed updates its interest-rate forecasts

The Fed is overwhelmingly expected to leave interest rates unchanged when it concludes a two-day policy meeting on Wednesday. Investors will pay close attention to the so-called dot plot, a graph representing individual policy makers’ expectations for interest rates, and part of the Fed’s quarterly Summary of Economic Projections.

The Fed: Is a June rate cut still possible? Fed’s Powell will look to keep options open this week.

The problem is that there has been little progress in bringing down inflation since the dot plot was last updated in December, and that “is where the danger lies in this week’s meeting,” David Kelly, chief global strategist at J.P. Morgan Asset Management, said in a client note on Monday.

Among the 19 contributors to the December dot plot, the median forecast was for the fed-funds rate to fall to 4.6% by the end of 2024 and to 3.6% by the end of 2025, down from its current range of 5.25%-5.50%. In other words, three quarter-point rate cuts this year and four next year.

Such a timetable would allow the Fed to cut only during those meetings when they produce a new Summary of Economic Projections, which comes in March, June, September and December, Kelly noted, adding extra clarity to their actions and establishing a comfortable pattern for market participants. The pattern would allow the Fed to embark on its journey of policy normalization at its June meeting — well in advance of the November elections, so that it couldn’t be accused of favoring one political party or the other via a late-in-the-day policy switch, he wrote.

But looking at the December dot plot, it’s clear it wouldn’t take much to upset the plan, he said, noting that six Fed participants favored exactly three rate cuts in 2024, while eight favored fewer cuts and five wanted more.

“If just two of the six centrists were to turn slightly more hawkish, the forecast for three rate cuts in 2024 would shrink to two, upsetting this timetable and markets at the same time,” Kelly said.

Builder confidence rose for the fourth month in row in March, as home-buyer demand remained strong. The expectations of a jump in demand in the coming months pushed the National Association of Home Builders’ monthly confidence index up 3 points to 51 in March, the trade group said on Monday.

Companies in focus

• Alphabet Inc. shares rose 4.4% following a report from Bloomberg that Apple Inc. may license Google’s Gemini artificial-intelligence engine and use it in the iPhone. Apple shares rose 0.6%.
• Nvidia Corp. began its annual developers conference, with a keynote from CEO Jensen Huang getting under way just as markets closed at 4 p.m. Eastern time on Monday. Nvidia shares rose 0.7% Monday; through Friday, the stock has soared 77% this year and 239% over the last 52 weeks.
• Stephen Scherr, a retired Goldman Sachs Group Inc. banker, is stepping down as CEO of Hertz Global Holdings Inc. at the end of the month. He’ll be succeeded by Gil West, who served as chief operating officer at Delta Air Lines and the general manager of GM’s Cruise autonomous-driving unit. Hertz shares fell 6.2%.

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