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Stocks close lower after the Fed hikes interest rates

CNBC logo CNBC 6/13/2018 Thomas Franck and Alexandra Gibbs
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Stocks gave up earlier gains to end lower Wednesday after the Federal Reserve hiked interest rates and indicated that two more increases are likely this year.

Media stocks like Twenty-First Century Fox rallied earlier in the day after a judge's ruling that the AT&T and Time Warner deal could go through raised valuations across the media industry. The earlier rally pushed the Nasdaq composite to a new intraday high.

The Nasdaq closed 0.1 percent lower after rising to record highs on gains in Netflix and Amazon.

The Dow shed 119 points as losses in Boeing and Caterpiller offset positive numbers in the Walt Disney Co. The S&P 500 lost 0.4 percent as health care and technology struggled against losses in energy and telecommunications.

The Federal Reserve hiked interest rates 25 basis points as widely expected after its June meeting and suggested two more increases are likely this year. The move elevates the funds target rate to 1.75 percent to 2 percent.

The Fed changed several phrases from its prior memos, citing more optimistic economic growth and better inflation expectations.

"Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate," the Fed statement read. "Job gains have been strong, on average, in recent months, and the unemployment rate has declined."

The U.S. economy added jobs at a solid pace in May, adding 223,000 jobs over the month, according to the Labor Department. The closely watched average hourly earnings metric, however, rose 0.3 percent, in-line with economists' expectations.

The government added this week that its consumer price index, often viewed as an inflation barometer, increased 2.8 percent in the 12 months through May, the biggest advance since February 2012, after rising 2.5 percent in April.

A slowdown in the climb of gasoline prices helped dampen the movement upward, though core CPI, which excludes volatile food and energy costs, also rose 0.2 percent. The year-over-year increase in core CPI is now 2.2 percent.

Most media and telecommunications stocks rose Wednesday following a U.S. District Court's decision to allow AT&T's $85 billion bid for Time Warner.

The federal judge's ruling did not impose conditions on the merger's approval, clearing the way for other vertical deals. The approved deal gives the pay-TV provider ownership of cable companies such as HBO and CNN as well as film studio Warner Bros.

Shares of Twenty-First Century Fox rallied 7.2 percent Wednesday, ahead of a widely anticipated bidding war between Comcast and Disney for portions of Rupert Murdoch's business.

Disney, which offered Fox an all-stock, $52.4 billion deal for assets including cable networks and its entertainment businesses, will likely be forced to decide whether it's willing to top a significantly higher bid from Comcast. Disney shares turned around after opening lower and were higher by 3.1 percent.

Time Warner shares rallied 3 percent following the ruling, while online television and film company Netflix rallied 4.5 percent after Goldman Sachs reiterated its buy rating on shares and raised its price target to the highest on Wall Street. 

AT&T shares declined.

Media stocks are "moving on all of the possible M&A activity and I think it's the other potential M&A targets that are getting the attention now," said Art Hogan, chief market strategist at B. Riley FBR. "The other concern today would be if the signal coming out of the Fed is two more hikes this year and consensus moves up on that."

While U.S. markets have remained comparatively calm over the past two weeks, stricter monetary policy from the Fed, as well as more hawkish commentary from the European Central Bank, appeared to stress certain debt-heavy economies like those of Italy and Brazil.

The ECB will hold its policy meeting on Thursday. The institution's chief economist, Peter Praet, said last week that the central bank will discuss how it will wind down its bond-buying program at the meeting, a move that could affect rates worldwide.

Politics is however still likely to be on investors' minds, as markets evaluate the outcome of a meeting between President Donald Trump and North Korean leader Kim Jong Un, who both signed an agreement Tuesday that committed to "complete denuclearization" of the Korean peninsula.


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