The Fed Leaves Rates Unchanged… And Impact On The Bank Trade 6/12/24

0:03Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast breaking out, ending a three-day downdraft. But one big name didn't come along for the ride, the stock on the sidelines and what it means for the sector. Plus, Tim's blicep trade gets a boost from lift surge. Oil prices rise as energy stocks take a hit. Broadcom booms after earnings. And an interesting trade in GameStop piques our interest. What's behind the late-day sell-off here? I'm Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Freinerman, Dan Nathan, and Gaia Dami.

0:48We start off with markets pairing their gains after Jerome Powell's press conference. The Nasdaq and S &P both setting new records on the heels of the Fed decision and softer than expected CPI report, but closing well off their highs of the session. The Dow down about 35 points. Take a look at some of the big winners of the day. Banks rising more than 2%, home builders up more than 3%. Apple and Nvidia also seeing outsized gains today. More on Apple in just a minute. But we begin with the headlines from the Fed and the inflation report. Let's bring in CNBC's Steve Leesman, who is there on the ground.

1:18Steve. Hey, Melissa. Yeah, it was a dovish morning followed by what you might call a hawkish afternoon for markets. And you can see the entire drama playing out in bold relief in the bond market where yields plunged on the two-year note with that better-than-expected inflation report this morning. Then they bounced higher with a more hawkish Fed statement and projections than the market had expected. Though bonds did hold on to some of their gains and stocks seem to, well, ignore at least a good part of what the Fed did today. They forecast for the Fed this year for the funds rate went from three in March down to one right now for the full year.

1:52They did raise the neutral rate, suggesting they think they're less restrictive than they were before. They see higher inflation this year and a modest nod in the statement to the recent inflation progress that we've seen. Fed Chair Powell was maybe a bit more dovish than the statement and the projections. He suggested one or two cuts were still possible beginning in September and that he welcomed today's inflation report. But he suggested Fed officials remain cautious because of that spike in inflation we had in the first quarter. What we've been getting is good progress on inflation with growth at a good level and with a strong labor market.

2:27Now, ultimately, we think rates will have to come down to continue to support that. But so far, they haven't had to. And, you know, that's why we're watching so carefully for signs of weakness. The September Fed Funds Futures tells the story, too. Exuberance about rate cuts after the inflation report lifted that probability 73 % from 55 % before CPI. Traders then dialed back their enthusiasm and bid it down to 61 % after the Fed meeting. I think you can think of the difference between the Fed and markets as one between optimists and pessimists about inflation. The Fed, maybe a bit like the groundhog that saw its shadow in the winter and crawled back into their hole, declared six more months of high inflation.

3:05in the market. They've seen the sun break out from behind the clouds during the last two inflation reports, and they're ready for summer, the beach, and rate cuts when they come back in September, Melissa. Steve, I'm wondering, what is the cadence in terms of the information flow to the Fed before they actually decide on their dots that go in the plot? In other words, do they walk in thinking that we're going to be at two or we're going to be at one, and then they get the CPI data? And, you know, I'm just wondering if they would actually update their stance based on data released this morning?

3:36Well, they certainly could. How many did? We don't know. Powell was asked that question. It was unclear from his answer how many actually did upgrade their outlook because of that. It's an interesting question. But, Melissa, I'd go a step further. The bigger question to me is, does the last two months of inflation, which have been better, do they sort of wipe out the first three months in the sense that they tell us that those first three months were really indeed a beginning of the year phenomenon or seasonality that wasn't adequately corrected for. So to me, it's not just one report or two reports, but to the last two and maybe a third one, if we get another good one for the month of June, do they kind of say, you know what, we were head faked by the first part of the year, and that shouldn't be as much a part of our outlook as it seems to be for the Fed right now.

4:31Hey, Steve, it's Karen. Thanks for being on. Which do you weigh as more meaningful piece of information, that CPI print or the hawkish tone from the chair? You know, you've got to take both of them into account, Karen. I don't know that I can weigh either because what you're trying to do in my job and then, you know, by extension in your job, too, is figure out what the reaction function is. How moved are they going to be by the data that comes in? You know, a British economist, Ian Shepperson, made a joke that I don't even quite get, but it was sort of funny. He said, today's dot plot is going to have the shelf life of Liz Truss's lettuce.

5:07I guess there was a thing in Britain about her lettuce wilting quickly because she was only in office for a little bit. I understand that. I was thinking, like, you know, it's going to have a shelf life of a Scaramucci, you know, in terms of something I understand anyway. Anyway, in any event, if you get a couple more, this one looks to me, I'm very, I was surprised that so many, there were a bunch of people, 10 officials were at 467 or lower in March. And now none is lower than 487. So that's really a big shift on the committee. They kind of went, somebody, I don't even like this metaphor, said the Fed has sort of PTSD from the first quarter of the year.

5:50And I think that's true. And part of it is mechanical, because I did run the numbers. And Powell's right. If you do zero twos, which are pretty good on core PC for the rest of the year, your year-over-year rate does go up. Your three-month and six-month annualized comes down and crashes down over that period of time. But if you're going to follow the year-over-year, look, here's the danger. And I'm really interested in whether or not this becomes a trade, right? It hasn't been a trade for a while. But is the new trade the Fed making a mistake here? The Fed holding on too long and driving the economy down into an unneeded downturn.

6:26And if you hold to that inflation report, if you follow the year-over-year rate, I think you are led down the wrong path. Well, that's interesting, Steve, because I don't know how it came up. I missed, but growth in payroll jobs may be a bit overstated, which I thought was sort of interesting. What were your thoughts on that? I think that's possible. You've got to be really careful. You know, there's a plus or minus 100 ,000 on how confident we are in the number that comes out. I do like to follow the unemployment rate. It has been ticking up. And if you look at a cross, you have a cross that shows the unemployment rate gradually coming up and the inflation rate coming down.

7:03That's the response you would expect to see if indeed the Fed was restrictive. And so you kind of see it play out. It's well to remember the Fed has only been at this rate for what will be a year in July. But you do see the inflation rate still coming down. And today's number is really interesting because almost immediately after now, hold on, because we've got to get the wholesale report tomorrow to get a feel for you put that together with the CPI. Then you know what the PCE is going to be at the end of the year. It shouldn't be this complicated, but it is. I'm sorry. Anyway, Goldman almost immediately came out with a report saying they see two six for the core PCE by the end of it.

7:41It'll come out at the end of this month. That is what the Fed had forecast for the full year. So that was my question to Powell is, why do you not see any real gains at all in the inflation rate this year? Steve, thanks. Always great to get your analysis. Steve Leisman in D.C. What did you make of today's reaction? His analysis and his jokes, or not his jokes, his retelling of jokes. Well, I mean, I think the entire Fed meeting will have that, you know, less than that shelf life of Liz Truss's lettuce. Yeah. Anyway, but that's they're funny over there on the other side of the pond. I I look at the move that the equity market had upon the announcement at two o 'clock and then kind of what I call the cha cha cha.

8:22You could have said there was no Fed meeting today. I'm telling you, the CPI was what the story was and the market was rebalancing. So I think the market, you know, whatever the Fed said today, who cares? That dot plot, I kind of agree with that number. It was three to one. That was seemingly hawkish. Next year, you cut down one to five. But ultimately, you look at what the bond market had done through that CPI number, and that told you all you needed to know. The market is getting more comfortable with an environment where I think we've had a mosaic of economic data over the last 10 days. I'm talking about joltz data.

8:55I'm talking about unit labor costs. I'm talking about a payroll number that was so much more balanced in terms of the job openings and the level of unemployment that the Fed is kind of like, yeah, we're hanging tight. But of course, he's going to try to be as hawkish as possible. And of course, as he wants to do, he can't help himself but be dovish. But today, the story was more about CPI than it was about the Fed. And I think the market is kind of reading through that. Yeah. And Steve just said the big question is, right, are the Fed going to make a mistake, right? Are they going to kind of keep their foot on the pedal for too long?

9:26And when you think about that, just, you know, the potential to slow down the economy. I mean, on the flip side of all that data that Tim just mentioned, you know, that looks pretty strong. there's actually under the hood been some weak consumer data, right? And so when you think about that, there's also two different economies right now. So if you were an asset holder, right, before rates went up, if you are along the stock market or lots of stocks, it's been a good time, right? Real estate's become kind of scarce because there is, you know, not a great amount of demand where yields are right now, right?

9:56And we know there's problems in commercial real estate, and that's a different story. But, you know, on the other side of it, you know, Guy just mentioned that question about wage growth and the like. And that's the thing. If we just, on a cumulative basis, as we talked about with inflation, that's hurting middle and lower class right now. And that's the thing that has the potential to really slow down the economy. Right. Except that they are getting some relief, at least on the groceries. The things that they spend on every day. Energy came down, right? Insurance, big. Insurance came down. I'm not going out to dinner anytime soon.

10:23I mean, the costs on eating out are getting absurd. And we learned that. But grocery bills should be coming down. beef, seafood, vegetables, eggs, milk, butter, all those things came down on a month-on-month basis. So the consumer may be, there may be data showing that consumers stretch, but maybe they're getting a little bit of breathing room here with prices not going up as quickly. Hopefully. Although, I mean, I agree with Tim on the point of that, to me, the CPI was far more important. And I understand him wanting to be hawkish. Why not? Why give it away for free, right? And, you know, if we look at...

10:58in relation to other things. Are we back to those? Like cows and milk? Yes, yes. Something like that. I heard it. But I have trouble believing the argument that they're going to make a terrible mistake by not cutting soon enough. Let's say they are a little late for a short amount of time. I have trouble thinking that will really, that'll just blow the whole thing. After 11 increases, if they delay 25 basis point cut by a few months, I don't know if that's going to be detrimental. They need to see two more CPIs like we saw today. Why would you wait? I mean, why would you move any faster than that?

11:32And again, it's why the calendar and the dynamics and maybe it doesn't matter. But it means, yeah, maybe you get September. That's the debate right now. Is it September and December? Is it just December? But I mean, the calendar math and the need for two CPIs that are like today or better is telling you what we're going to get this year. So that's why everyone's looking to next year. And frankly, I think that's why investors are starting to look out on duration in the bond market. That's another topic. Last night, you posited, you being Melissa Lee, that maybe the 10-year auction, it was so well done, so good, in fact.

12:03In contrast to the poor auctions. But maybe they were front-running with the anticipation of this. So now let's see. Because, you know, to me, I'm actually that late rally in yields sell-off in the bond market is interesting. So, you know, I'll remain one of the few people that still think rates are going higher. But it's going to be interesting to see how it plays out over the next couple of weeks. All right. For more on the Fed decision and inflation, let's bring in Michael Schumacher. He's a global head of macro strategy at Wells Fargo Securities. So what did you make of this decision and the market reaction?

12:34Yeah, CPI was the dominant piece of news. I agree with Tim's comment. You think about Powell, he was a little bit downbeat. I thought he might maybe not take a victory lap, but at least smile a bit more. And he wasn't really all that fired up. But the market's going to look at the data, just like the Fed will. And this was a great print, but it's only one. Think about the jobs report only a few days ago. Red hot, wages up, jobs sky high. That was bad for the Fed. So a few days later, we get some good news, but it's only one piece. So I think people need to see a bit more on the FOMC before they really get pulled up.

13:05So you haven't changed your outlook on equities or your feeling about the markets based on CPI slash Fed today. Decent environment for risk because we know that a rate hike's virtually certainly not going to happen. So that's a positive. But as far as getting that extra push from a rate cut, that's got to wait for a while. I agree again with Tim. It's twice in one day, Tim. Well, two is the magic number. Time is not going to be the charm. In terms of good data prints, you need more good news on inflation, not just one more, probably a couple. So decent environment for risk. Not yet time to buy a lot of bonds, in my opinion.

13:39Yeah, it's interesting you say that. So you saw the move down in yields. We basically stopped where we bottomed out a couple weeks ago. So is it just in this range, just four and a quarter, 465 in a 10-year? Or is it going to break? I think it goes higher, but what are your sense in terms of how it breaks? I think that range is about right. The big news this year is going to be the actual cut. When the cut happens, whenever it might be, September, November, December, who knows? Our advice to clients is pretty simple. At that point, the market will price a lot more rate cuts. That's when you get the big move down in yields.

14:10Until then, probably not. So if we think out toward the end of the year, yes, we do think there will be a cut or two. by D's 31. So 10-year ends the year, four, maybe it's 390, somewhere in that vicinity. But that big move down, we think is going to be a bit delayed. People will wait on the Fed. So, Michael, is that what the equity market's doing then? If we know we're going to get a cut in September or maybe December, why would you wait? And obviously, the equity market hasn't waited since last October. But the argument is that equities and the markets are a discounting mechanism. And so to me, it's really powerful what you're saying when you simplify it, and maybe not overly, I don't think you are, but this is a decent environment for risk.

14:46The VIX went down to 12 today. It fell 6 % almost on that CPI number. So doesn't this say green light equities? It seems like a pretty decent green light signal for risk. I agree with that. And it's interesting, Tim, if you compare volatility and rates, let's say to equities, VIX super low, rate volatility is still high, FX volatility pretty low. It's the rate market that seems a little upside as far as the volatility measure. And lastly, one more reason why I think people in rates are reluctant to take risk. You think about the shape of the yield curve. I know it's a little bit arcane, but still it's inverted.

15:19It's unusual. So for a lot of people in bond land, if they can't fund at a relatively cheap level, they simply do not want to buy that five-year, that 10-year, let alone the 30-year security. That has to change a bit. It's going to take some time. So you had said you think once they start cutting that you think there will be multiple cuts. Why should that be the case? If we look at over the last 60 or 70 years, Where we are right now has been about the average, which includes the 80s, super high, includes zero for a good amount of time also. Why should it be very different than that? Yeah, it's interesting, Karen.

15:52If you go back to the 1980s and you look at the average of all the easing cycles since then, the average size of the rate cuts in the first year alone is about 260 basis points. It's huge. And yet if I look at what the market price is right now today from September of this year, So let's assume that's the first cut to September of next year. It's maybe 100. So I'm not arguing the Fed's going to do 260 basis points, but the market pricing seems awfully light. So there's quite a bit of room in our view of Wells Fargo for that to go up to 150 or 175 basis points, maybe 200, and probably in pretty fast order, frankly.

16:29That could be a month or two, maybe. So the market seems awfully pessimistic. That's hard for us to accept. What do you think about, back to the equity market, Russell 2000 was massively outperforming the S &P and the NASDAQ early this morning after the CPI print. It kind of closed near the lows, but it's kind of unchanged on the year. Are there any parts of equities that you like more than others? And is Russell an area that you would like if we do start getting more aggressive rate cuts like early next year? Yeah, I'm going to defer to my guru, Chris Harvey, on that one. Certainly he's got all sorts of opinions on which sector to get into.

17:00With respect to broad macro, though, I think you've got to be fairly comfortable right now that the Fed at least is not going to derail the markets. And oh, by the way, we've had rate cuts just in the last 10 days from Bank of Canada, ECB, going back to last month from Sweden, Switzerland a bit farther back. The rate cuts are happening. So the Fed is late, perhaps, but others are already doing this too. Michael, great to see you. Thank you. Thank you. Meantime, Apple continuing its post-WWDC momentum, rising nearly 3 % today, closing at another record. It did end well off the highs of the day.

17:32Shares had been up more than 6 % earlier in the session, and Apple seemed to unpace to reclaim the top spot in market cap. For Microsoft, it closed today about$10 billion off of that mark. I'm going to go to Dan first on this. I'm a little bit dumbfounded. I mean, this seems like it's not based on fundamentals. It's based, obviously, on the anticipation that this is going to be a huge earnings revision cycle. This is not a company that has had that in a very long time. So I don't know if this is like investors getting behind this, whether it's the machines playing for a breakout and playing this sort of momentum.

18:05But I'm still kind of stuck that I think that the launch of iOS 18 in the fall, I just don't think we're going to see all of the sorts of stuff that they detailed there. And I just don't see a big upgrade cycle. So, again, you know, we didn't see numbers move up. We saw multiple expansion and it's a beautiful breakout. I get it if you're like a trick. But it's hard to move around a three trillion dollar market cap company. And obviously there's some capital that's very committed to this. But I suspect you see this thing retraced back to 200 in the not-so-distant future. I think it's a combination.

18:35It's hard to like the multiple. You know, it's hard to like Apple expanding their multiple here. And, you know, iOS 18, you know, there's jokes. There's all kind of memes out there today, like from Samsung people, like, oh, iOS 18. It looks like, you know, it looks like 2015 all over again. So there is some sense that Apple's not on the leading edge of innovation. But you get back to a company that's growing software and services anywhere from 8 to 12 percent at a 75 percent gross margin. You know, whether this is the mass, it's not the massive reset, you know, it's not the reset moment for the buying of handsets.

19:09But it is a case where 250 ,000 or so handsets, 250 million, excuse me, are going to have to go every year. It's kind of like the shelf life of cars. They're six to seven and a half years old. People are going to go out and buy them. I just think when you've seen the CapEx and that was even reinforced by an Oracle, everyone who needs to be around A.I. is talking about CapEx. And what it's proven is that people remember that Apple is the way to the consumer. And I do look at that chart that did nothing for two years. S &P had one of the great bull markets of all time and Apple underperformed the S &P by three percent going all the way back to Jan of 2022.

19:42The fact that people are now reminded and they need another place to go and this is big capacity, it doesn't surprise me. Last three days of volume. Today, for example, almost 200 million shares. So three times normal volume. Yesterday, two. I mean, obviously, people are now either playing catch up or saying this is real, this is a breakout. And, again, I think it comes down to percentage services revenue, percentage of overall revenue. If people think clearly that's going to start to tick up north of 27, 28 percent, which justifies the multiple, I don't know if it's going to happen in the near future.

20:14Coming up, we are watching Broadcom on the move after reporting results. The numbers, the 10 for one split, and the conference call next. And two stocks hailing some major gains. Uber and Lyft both jumping in today's session. But can these names stay in the fast lane? We'll debate that when Fast Money returns.

20:38Welcome back to Fast Money Earnings Alert on Broadcom. The chipmaker at all-time highs after reporting EPS and revenues that beat consensus estimates. The company is also announcing a 10-for-1 stock split. The conference call underway just at the top of the hour here, 23 minutes in. Christina Parts Nevelis has got the latest. Hey, Christina. All the cool kids are doing it. Broadcom joining the likes of NVIDIA with a 10-for-1 stock split. It's going to happen as of the close of July 12th. Like you said, there was a strong Q2 earnings beat for custom AI chip designer Broadcom. Revenue is$12.49 billion.

21:07You can see on the screen versus estimates of$12.03 in the last hour, we had a banner that read$12.01 billion, but still a beat. CEO Hawk Tan on the call right now saying the results are driven by AI demand for custom chips and its networking business. More than offsetting any type of cyclical weakness. Speaking of that cyclical weakness, the CEO is saying Q2 is going to be a bottom for server storage with modest recovery in the second half of this year. They now think this is important. networking will grow 40 % year over year, and it's a big portion of their business, up from the previous 35%.

21:36Why are they so bullish? All those GPU clusters that people are spending money on need Ethernet networking products to connect them. That's where Broadcom comes in. Another strength for this company is VMware, which provides virtualization software and was required by Broadcom last November. VMware contributes about a quarter of total revenue, so that's seen as a strength too. And these two drivers, enough of a reason for the company to increase its full year 2024 guidance from$50 billion to$51 billion. And lastly, on the earnings call that's just going on right now, they just raised their AI revenue number from$10 billion to$11 billion.

22:10So all of these boosts, you can see the stock price up almost 12%. And that, you know, cherry on top, 10 for one stock split. Yep. Christina, thanks. Thanks. Christina Partzineboulos. I mean, 10 for one. Obviously, that makes the stock go higher. Clearly. I say sarcastically, in case you're wondering. in today's world. Yeah. So Apple's a 17 % customer. Then you have Dell and you have Alphabet about 9%. So again, this sort of demand should not be that surprising. And then think about the market's reaction to this. You know, you know, it's a tough, you know, you get no point. It's really tough to chase some of these things.