Premarket: Wait, why did stocks just rise?

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In fact, they relished it, viewing it as a sign the Fed was taking its job seriously after waiting too long to jump into the fray.

So why did Wall Street cheer Fed Chair Jerome Powell’s seemingly dovish turn? The S&P 500 jumped 2.6% on Wednesday, reaching its highest level since early June.

First came the expected. The Fed announced another rate increase of three-quarters of a percentage point, a move that would have seemed unthinkable just six months ago. That will bring the central bank’s key rate to a range of between 2.25% to 2.5%, the highest it’s been since December 2018.

Among investors, however, attention focused on what comes next. They honed in on comments from Powell during his press conference, which seemed to indicate that the central bank could start to go easier as the US economy slows down.

There appeared to be two pieces of evidence here:

  1. Powell emphasized that the Fed is moving away from forward guidance, or when it plainly telegraphs to the market what it plans to do next. “We will continue to make our decisions meeting by meeting,” he said, noting the Fed will carefully comb through data as it comes in.
  2. Depending on what this data reveals, Powell said rate hikes could be smaller in magnitude moving forward, as economic growth slows and recession risks rise. “As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases,” he said.

The read from markets: Digesting this information, investors decided they had priced in a Fed that was far too tough, and that it could pivot sooner than expected. While there had been fears that if the Fed were to relax a bit, inflation wouldn’t be brought under control, this anxiety was put aside.

“This slightest dovish turn was all the market needed to price somewhat looser financial conditions,” said Stefan Koopman, senior macro strategist at Rabobank.

Not so fast: Okay, so Wall Street has decided it doesn’t actually have a problem with a more chilled-out Fed after all, which could theoretically boost expectations for corporate earnings down the line. But debate is now raging about whether that was actually the correct read of Powell’s remarks.

“All Powell could do at the press conference today was talk about how inflation is too high, how the Fed is determined to bring it down, and (implicitly) how he would be willing to tolerate a recession if that’s what’s needed to get the job done,” Piper Sandler’s Roberto Perli and Benson Durham told clients. “In other words, the press conference was hawkish.”

They have a point. Powell even said that “another unusually large increase could be appropriate” in September if the all-important data supports it.

The bottom line: Uncertainty remains the name of the game. Where some see hawks, others see doves. The through line is that the Fed doesn’t really know what it will do next, and markets will remain hyper-sensitive to any commentary in the meantime as it tries to puzzle it out.

What counts as good news and what counts as bad news — well, that may depend on the day. We give up!

Coming up: The first read of US gross domestic product for the second quarter arrives shortly. It could reveal two quarters of shrinking output in a row, which meets one technical definition of a recession.

But Powell stressed that in his view, the US economy isn’t experiencing a contraction just yet, especially given the strength of the jobs market.

“I do not think the US is currently in a recession and the reason is there are just too many areas of the economy that are performing too well,” he said, adding that the GDP report should be taken “with a grain of salt.”

Facebook posts its first revenue drop as a public company

After years of rapid growth, Facebook’s near-term trajectory is clear. The social media giant is in decline.
The latest: Parent company Meta (FB) reported revenue of $28.8 billion between April and June, a 1% drop from the prior-year quarter and its first year-over-year revenue decline since going public in 2012.

Profit fell more sharply, sliding 36% year-over-year to nearly $6.7 billion. That’s a huge reversal from 2021, when its profit doubled. Shares are down 4% in premarket trading on Thursday.

What gives? One of Meta’s biggest problems comes from a slowdown in advertising spending as companies readjust their budgets to prepare for a potential recession. This trend is also battering competitors like Snap. It’s shown up in results from Google and Microsoft, too.

Meta reported a 14% year-over-year decline in the average price per ad.

“We seem to have entered an economic downturn that will have a broad impact on the digital advertising business,” CEO Mark Zuckerberg said on a call with analysts. “It’s always hard to predict how deep or how long these cycles will be, but I’d say that the situation seems worse than it did a quarter ago.”

Facebook did see daily active users rise to 1.97 billion in June, up from 1.96 billion in March. But greater competition from short-form video app TikTok has the company on high alert.

The company is doubling down on content recommended by artificial intelligence, which has been one TikTok’s greatest strengths. Zuckerberg said around 15% of content on Facebook feeds — and slightly more on Instagram — is now surfaced by algorithms from accounts that users don’t follow. It expects those numbers to more than double by the end of next year.

But that’s created backlash from users including Kim Kardashian and Kylie Jenner, who have complained that they still want to see pictures of their friends. Zuckerberg said that as Meta builds its “discovery engine,” it will still be “a social company.”

Watch this space: Meta wants investors to look to the future, when its success will mostly hinge on its ability to build out a robust virtual reality business. But US regulators are making that task harder. On Wednesday, the Federal Trade Commission moved to block Meta’s acquisition of VR company Within, alleging that it’s illegally attempting to grow its “virtual reality empire.”

JetBlue wins its battle for Spirit Airlines

JetBlue’s months-long campaign to buy Spirit Airlines has finally paid off.
On Wednesday, Spirit and rival budget carrier Frontier pulled the plug on their proposed tie-up, which had been on life support for months. That cleared the way for JetBlue (JBLU) to quickly step in, announcing a $3.8 billion deal to create the fifth largest US airline.

This just in: JetBlue announced Thursday that it plans to buy Spirit for $33.50 per share in cash, a 38% premium over the airline’s closing price on Wednesday, my CNN Business colleague Chris Isidore reports. Shares of Spirit leaped 4% to above $25 in premarket trading, while Frontier’s stock is 6% higher.

“Spirit and JetBlue will continue to advance our shared goal of disrupting the industry to bring down fares from the Big Four airlines,” JetBlue CEO Robin Hayes said in a statement.

But there are still doubts about whether the merger will get the green-light it needs from regulators — a longstanding concern among Spirit management.

JetBlue said it will pay Spirit shareholders an additional 10 cents a month for any delay in closing after December of this year. And if the deal is blocked, JetBlue will pay Spirit $70 million. Its shareholders would get an additional $400 million.

Up next

Altria (MO), Harley-Davidson (HOG), Mastercard (MA), Hershey Foods (HSY), Hertz (HTZ), Honeywell (HON), Pfizer (PFE), Southwest Air (LUV) and Tilray report results before US markets open. Amazon (AMZN), Apple (AAPL), Intel (INTC) and Roku (ROKU) follow after the close.

Also today: The initial reading of US GDP for the second quarter arrives at 8:30 a.m. ET.

Coming tomorrow: Did Europe’s economy expand during the second quarter? On the heels of the closely-watched US data, we’ll get a first look at the numbers. Economists polled by Refinitiv expect to see a quarter-over-quarter slowdown, but no contraction in activity — yet.

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