Stocks Rally as China Concerns Ease, Fed Keeps Stance Steady…..

U.S. stocks finished nicely higher to trim Monday’s tumble as concerns appeared to ease regarding real estate debt concerns in China, which was the major contributor to the early-week selloff. The recovery accelerated following the Fed’s highly-anticipated monetary policy decision, which delivered an unchanged policy stance, while holding off on naming a definitive start date for the tapering of asset purchases. The markets shrugged off the continued political stalemate regarding raising the debt ceiling with current and former Treasury Secretaries offering warnings if a deal is not reached. Treasuries were mixed, with the yield curve flattening following the Fed’s decision and the U.S. dollar moved higher in choppy trading. Gold fell and crude oil prices gained solid ground as oil inventories continued to be drawn down at a faster-than-expected pace. In economic news, existing home sales fell to snap a two-month winning streak, and mortgage applications rose as rates remained stable for a fifth-straight week. FedEx Corporation missed earnings estimates and lowered its guidance due to increased costs associated with the labor shortage, Adobe fell despite topping earnings estimates, and Stitch Fix rallied after posting an unexpected profit. Europe rebounded for a second day, and Asia finished mixed as China returned to action and showed some resiliency in the face of the real estate debt crisis.

The Dow Jones Industrial Average rose 339 points (1.0%) to 34,258, the S&P 500 Index rose 41 points (1.0%) to 4,396, and the Nasdaq Composite advanced 150 points (1.0%) to 14,897. In moderately-heavy volume, 876 million shares were traded on the NYSE and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.74 at $72.23 per barrel. Elsewhere, the gold spot price dropped $9.10 to $1,769.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 93.37.

Existing home sales declined 2.0% month-over-month (m/m) in August to an annual rate of 5.88 million units, versus the Bloomberg expectation of 5.89 million units, after July’s upwardly-revised 6.00 million rate. Existing home sales broke a two-month winning streak as each of the four major regions experienced declines on both a m/m and y/y perspective. Sales of single-family homes were down m/m and y/y, while purchases of condominiums and co-ops were down m/m but were higher compared to a year ago. The median existing home price was up 14.9% from a year ago to $356,700, marking the 114th straight month of y/y gains as every region recorded price increases. Unsold inventory was at a 2.6-months pace at the current sales rate, unchanged m/m but down from the from the 3.0-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.

National Association of Realtors Chief Economist Lawrence Yun said, “Sales slipped a bit in August as prices rose nationwide. Although there was a decline in home purchases, potential buyers are out and about searching, but much more measured about their financial limits, and simply waiting for more inventory.” Yun added that high home prices make for an unbalanced market, but prices would normalize with more supply.

The MBA Mortgage Application Index rose 4.9% last week, following the prior week’s modest 0.3% gain. The increase came as a 6.5% jump for the Refinance Index was met with a 2.2% advance for the Purchase Index. The average 30-year mortgage rate was unchanged at 3.03% for the fifth-straight week.

The markets paid close attention to the conclusion of the two-day monetary policy meeting from the Federal Open Market Committee (FOMC), which decided to hold its stance unchanged and held off declaring a definite starting date for when it will begin to tapering its monthly asset purchases. The statement noted that with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The FOMC also said since last December, the economy has made progress toward its maximum employment and price stability goals, adding that if progress continues broadly as expected “a moderation in the pace of asset purchases may soon be warranted.”

The decision was accompanied by updated FOMC economic projections, which showed the 2021 GDP growth rate was revised lower from its prior June forecast to 5.9% from 7.0%, while its outlooks for 2022 and 2023 growth were revised slightly higher to 3.8% and 2.5%, respectively. On inflation, the FOMC raised its 2021 estimate to 4.2% from 3.4%, while holding the 2022 and 2023 estimates essentially unchanged at 2.2%. The FOMC also continued to acknowledge elevated inflation but reiterated that this reflects “transitory factors.” On the outlook for the first rate hike, the median forecast was moved up into 2022 as the number of members forecasting a rate hike next year increased to nine from seven.

Shortly after the announcement Chairman Jerome Powell delivered his customary press conference, in which he said the Fed has met the test for its inflation goal to begin to taper but not yet for employment. He also discussed how the Fed’s increased short-term inflation forecasts come as near-term supply constraints continue to boost inflation but he said they are expected to wane and foster some moderation in inflation back to its longer-run target of around 2.0%. Powell also continued to stress the distinction between the timing of tapering and the lift-off date for the first rate hike. He noted that there is a substantially more stringent set of tests for determining when to announce the first rate hike.

Treasuries finished mixed following the Fed’s monetary policy decision, with the yield on the 2-year note rising 2 basis points (bps) to 0.24%, while the yield on the 10-year note declined 2 bps to 1.30%, and the 30-year bond rate decreased 4 bps to 1.82%.

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