LIVE MARKETS-Tesla snaps record 13-day winning streak that cost short sellers $7 billion

Tesla’s (TSLA.O) snapped its record winning streak on Wednesday after its shares unofficially closed down 0.7% at $256.79

The last 13-straight sessions of gains cost Tesla short sellers $7.00 billion in mark-to-market losses, taking their year-to-date losses to nearly $12.68 billion, according to S3 Partners.

The surge has added nearly $240 billion to the market capitalization of the company that is already the world’s most valuable automaker. That is more than the entire value of Japan’s Toyota (7203.T) , the next most valuable automaker. Tesla shares have also more than doubled in value this year.

But the electric carmaker’s stock price still eludes Wall Street, with the gap between the stock price and the mean target of analysts (at $189.33) widening to the highest in about five months, according to Refinitiv data.

The rally was fueled by adoption of Tesla’s charging system by Ford and General Motors. This effectively puts 60% of the U.S. EV market on the North America Charging Standard used by Tesla.

(Chavi Mehta)

U.S. STOCKS PLUNGE AFTER HAWKISH FED PAUSE (0220 EDT/1420 GMT)

The Federal Reserve delivered a pause in its rate hikes at the conclusion of its latest policy meeting. However, officials penciled in additional rate rises for this year and said they foresee inflation pressures continuing to ease over the next few years, in updated forecasts released on Wednesday.

Officials now expect the fed funds rate to top out at 5.6% this year, implying two more 25 basis point increases in 2023, up from the 5.1% they projected in the last set of forecasts released in March.

According to the CME’s FedWatch Tool, the probability that the Fed will sit on its hands again at the July 25-26 FOMC meeting is now about 28% vs 42% just before the statement was released. There is now a 71% chance of a 25 basis point increase vs 57% ahead of the statement, and there is now a 1% chance of a 25 basis point rate cut vs 0% ahead of the statement.

The main indexes are red with the S&P 500 (.SPX) down around 0.7% on the day. The benchmark index was up around 0.2% just before the statement came out.

All S&P 500 sectors have weakened since just prior to 2 PM, with discretionary (.SPLRCD) taking the biggest hit over this period.

Banks (.SPXBK) (.KRX) are among weaker groups over this time frame.

Regarding the FOMC, Michael Brown, market analyst at Traderx in London said, “Clearly, the strength of the labor market, and ongoing concerns over the stickiness of core inflation are continuing to drive policymaking for Powell & Co, with a victory lap to celebrate the inflation beast having been slain still some way off.”

Brown added “Markets have, unsurprisingly, reacted hawkishly as the decision dropped - firmer USD, higher Treasury yields, and marginal downside in stocks - a pattern that, if Powell continues the hawkish tone at the press conference, could set the tone for trade over the rest of summer.”

(Terence Gabriel, Saqib Ahmed)

TESLA’S $240 BILLION RALLY LEAVES WALL STREET PRICE TARGETS IN THE DUST (1226 EDT/1626 GMT)

Even Wall Street analysts are failing to catch up with a record rally in Tesla shares (TSLA.O) .

The company has gained for 13 straight sessions, widening the gap between its stock price and the mean target of analysts to the highest in about five months, according to Refinitiv data.

It has also cost Tesla short sellers $7.00 billion in mark-to-market losses, taking their year-to-date losses to nearly $12.68 billion, according to S3 Partners.

And some analysts say the rally could run further.

“There is an out-and-out momentum play here,” said Chris Weston, head of research at Melbourne-based broker Pepperstone Group.

“The options crowd buy upside calls (slightly out-of-the-money) and as the price moves higher options dealers (who sold the calls) must hedge their exposure – they do that by buying Tesla’s stock and this just perpetuates the move higher.”

There are also some other drivers - the U.S. Federal Reserve is widely expected to hold interest rates steady on Wednesday, a move that could add more fuel to the recent rally in growth stocks.

Ford and General Motors have said they would adopt Tesla’s charging system, effectively putting 60% of the U.S. EV market on the North America Charging Standard used by the company.

Tesla has also slightly raised the price of its Model Y in the U.S. after a series of aggressive cuts earlier this year.

“I see some technicians screaming that Tesla has an RSI (relative strength index) of 88, suggesting an imminent collapse,” said Weston.

“To me, it suggests the risk/reward trade-off is certainly turning and putting new money to work at these levels carries a higher risk. I would stay with the momentum and look to buy weakness.”

(Aditya Soni)

COULD THE FED SURPRISE WITH A JUNE RATE HIKE? (1202 EDT/1602 GMT)

The Federal Reserve is widely expected to keep rates unchanged when it concludes its two-day policy meeting on Wednesday. But what if it surprises markets with a hike?

Citi economists say that if it happens it would be justified by still high inflation.

“The rationale for not hiking today (a market and public perception that the June hike will be “skipped”) is not nearly as compelling as the rationale for going ahead with a hike,” the economists said in a note. “Not hiking today would be inconsistent with guidance that policy decisions will be made meeting-by-meeting and contingent on (recently stronger than expected) data.”

Data on Tuesday showed that consumer prices gained modestly in May, which boosted expectations that the Fed will pause rates hikes this month.

But Citi notes that “yesterday’s core CPI at 0.44%MoM is a reminder that core inflation is stuck near 5% and it will likely take more hawkish Fed policy – either today or later – to cool prices.”

Fed policymakers on Wednesday are expected to revise higher their interest rate and inflation projections.

“A ‘surprise’ Fed rate hike has not been seen since the 1990s – but the biggest Fed policy surprise in 30 years might be appropriate given the highest inflation in 40 years,” Citi concluded.

(Karen Brettell)

NOT SO FAST ON THE ALL-CLEAR, RECESSION AHOY! -DEUTSCHE BANK (1145 EDT/1545 GMT)

The clock is ticking and everything is going to script for Deutsche Bank’s call for a U.S. recession in the fourth quarter.

The Fed’s aggressive rate hikes needed to tame inflation largely induced by expansive fiscal and monetary policy have now materialized, Deutsche Bank says in a note.

“We have consistently argued over the last two-three years that the U.S. is heading for its first genuine policy-led boom-bust cycle in at least four decades,” says David Folkerts-Landau, group chief economist at the bank.

“Avoiding a hard landing would be historically unprecedented.”

Central banks are confronted with a dilemma that interest rates might still be too low to bring inflation to target, but they are high enough to trigger global accidents, he says.

Default rates are set to rise as the tightest Fed and European Central Bank interest rates in 15 years meet elevated corporate leverage, the note said.

Stagnation will ensue amid simmering U.S.-China tensions and the escalation risk of the war in Ukraine, it said.

But, AI has arrived and may be a new source for growth amid a poor cyclical outlook, low productivity and declining demographics.

(Herbert Lash)

TODAY IN FED FODDER: PPI COOLS, MORTGAGE DEMAND JUMPS (1127 EDT/1527 GMT)

Investors began Fed Wednesday on the right foot, with happy news about inflation and the housing market.

Starting with inflation, ears are burning regarding what Powell & Co may have to say about the Labor Department’s Producer Prices index (PPI).

PPI (USPPFD=ECI) , which measures the prices companies get for their goods and services at the figurative factory door, reversed course last month and actually contracted by 0.3%, steeper than the -0.1% consensus.

Year-over-year, headline PPI slid 1.2 percentage points to 1.1%, dipping below Powell & Co’s average annual 2% inflation target.

The report “confirms that inflation continues to decelerate and puts even more pressure on the Federal Reserve to pause its interest rates hikes,” writes Robert Schein, chief investment officer at Blanke Schein Wealth Management.

“We expect the Fed to announce a hawkish pause on Wednesday, signaling that though interest rates will not be increasing for June, this does not necessarily mean future rate hikes are off the table,” adds Schein.

Looking at “core” PPI - which strips away food, energy and trade services - monthly and annual prints landed at unchanged (0.0%) and 2.8%, respectively.

The above refers to the “final demand” element of PPI - or business-to-consumer prices. Peeking under the hood, we find intermediate demand (business-to-business) saw a sizeable 4.8% drop in unprocessed goods - good news for factory input costs - which handily offset a 0.2% increase in services and an unfortunate 1.7% jump in construction.

On balance, the cooler-than-anticipated report makes PPI the third major May indicator, after wage growth and CPI, to demonstrate that the Fed’s restrictive policy rate is working as directed:

Next, demand for home loans jumped by 7.2% last week as the cost to borrow eased somewhat, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate (USMG=ECI) shaved off a negligible 4 basis points to 6.77%. That was enough to prompt a 7.7% increase in applications for loans to purchase homes (USMGPI=ECI) and a 6.0% jump in refi demand (USMGR=ECI)

“Rates that are still more than a percentage point higher than a year ago, and low for-sale inventory continue to constrain homebuying activity in many markets,” said Joel Kan, deputy chief economist at MBA.

Kan’s not blowing smoke. Inventories are low, credit is tightening, and mortgage rates are still elevated.

As the graphic below demonstrates, overall mortgage demand remains 32.1% below the same week last year:

Stocks are mixed in morning trade, as market participants watch the clock tick toward 2pm EDT, when the Fed is due to announce its rate decision and release its hotly anticipated dot plot, which will provide a glimpse into the Fed’s interest rate crystal ball.

(Stephen Culp)

U.S. STOCKS TRADE MIXED AFTER ENCOURAGING INFLATION DATA (1002 EDT/1402 GMT)

Wall Street is little changed early on Wednesday as investors try to assess how tight monetary policy impacts the economy after favorable data on U.S. consumer and producer prices likely seals a Fed decision later in the day to pause its hiking cycle.

Energy (.SPNY) is leading S&P 500 sector gainers in the early going, while healthcare (.SPXHC) is the only group in the red.

Banks (.SPXBK) (.KRX) , FANGs (.NYFANG) , and Transports (.DJT) are outperformers.

U.S. producer prices fell more than expected in May, the smallest increase in nearly 2-¹⁄₂ years, following data on Tuesday that showed the year-over-year increase in the consumer price index last month was the smallest since March 2021.

While headline inflation data has been encouraging core measures reflect persistent price pressures, says John Lynch, chief investment officer at Comerci Wealth Management in Charlotte, North Carolina.

An anticipated “liquidity drain” brought on by the replenishment of the Treasury’s general account and tighter credit conditions should push market rates higher and weigh on equities, in particular recent growth leaders, Lynch says.

“We continue to position portfolios favoring value, with cyclical opportunities in industrials and financials.”

After strong first-quarter results, Generali Investments sees U.S. earnings growth slowing to 2%-3%, which along with increased investor positioning to neutral and monetary policy’s disinflationary traits, are set to weigh on stocks.

The following is a snapshot of early market prices:

(Herbert Lash)

U.S. STOCK FUTURES MUTED AFTER PPI, AHEAD OF FED (0900 EDT/1300 GMT)

U.S. equity index futures are little changed in the wake of the release of the latest data on U.S. inflation.

The May PPI, on a month-over-month and year-over-year basis came in cooler than expected, while the ex-food/energy month-over-month was in-line with the Reuters Poll. The year-over-year ex-food/energy print was weaker than expected:

According to the CME’s FedWatch Tool, the data has not moved the dial much on the probability that the FOMC will leave rates unchanged Wednesday afternoon. It now stands at 92% vs 94% just before the numbers were released. There is around a 8% chance of a 25 basis point increase vs 6% prior to the data coming out.

CME e-mini S&P 500 futures (EScv1) are up around 0.1%. The futures were up around 0.2% in the moments before the numbers came out.

Most S&P 500 sector SPDR ETFs are quoted higher in premarket trade with energy (XLE.P) posting the strongest rise, up about 0.8% (NYMEX crude futures (CLc1) are rallying around 1%). Healthcare (XLV.P) is the weakest group, down around 0.5%.

The SPDR S&P regional banking ETF (KRE.P) is up about 0.4%.

One mover is the 10-Year Treasury yield (US10YT=RR) . It ended Tuesday around 3.84%, but has fallen back below 3.80% since the PPI numbers came out.

Here is a premarket snapshot just over 30 minutes after the data came out:

(Terence Gabriel)