Equities Higher After Fed Stands Pat, Announces Tapering…..

U.S. equities finished higher after the Federal Reserve held steady on interest rates and announced a schedule for tapering its asset purchases, moves that were widely expected. In the subsequent presser, Chairman Powell soothed nerves of a sooner-rather-than-later liftoff in its fed funds rate. Treasuries turned lower following the Fed’s announcement, lifting yields, and the U.S. dollar lost ground, while crude oil and gold prices saw noticeable pressure. On the equity front, Bed Bath & Beyond jumped, while CVS Heath Corporation was also higher, but Activision Blizzard fell on the heels of their respective earnings reports. In economic news, mortgage applications declined, and the ADP employment report showed that payrolls rose more than expected. Additionally, the ISM Services Index expanded at a record pace, Markit’s Services PMI Index was revised higher for last month, and factory orders rose. European equities finished mixed ahead of the Fed’s decision, while markets in Asia finished mostly lower in light trading as Japan was closed for a holiday.

The Dow Jones Industrial Average rose 105 points (0.3%) to 36,158, the S&P 500 Index increased 30 points (0.7%) to 4,661, and the Nasdaq Composite gained 162 points (1.0%) to 15,812. In moderate volume, 832 million shares were traded on the NYSE and 5.0 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $3.05 to $80.86 per barrel. Elsewhere, the gold spot price lost $13.70 to $1,775.70 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 93.83.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, making no change to the Fed funds rate, as was widely expected. In addition, the FOMC said it will begin tapering its asset purchases “later this month,” paring its current $120 billion in purchases by $15 billion per month–$10 billion in Treasuries and $5 billion in mortgage-backed securities. The move comes “in light of the substantial further progress the economy has made toward the Committee’s goals since last December.” In its statement the FOMC said, “The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.” Moreover, the Fed also adjusted its view on inflation, albeit slightly, indicating that the rise in prices has been more rapid and persistent that prior forecasts, but continuing to deem that the factors “are expected to be transitory.” No economic projections or its “dots plot” were released at this meeting.

Shortly after the announcement Chairman Jerome Powell delivered his customary press conference, in which he said the persistent rise in inflation was something that it would monitor carefully, but noted the effects of the supply bottlenecks, adding that demand remained strong and he expects pricing pressures to improve in Q2 or Q3 of 2022. Powell also tempered the notion of a liftoff of rates soon after the completion of its tapering, saying that the employment metric for such a move has not been fully met, as the labor market has not fully recovered and remains very tight. Get more insight on the Fed’s decision from Schwab’s Liz Ann Sonders later today on our Market Insights page.

The ADP Employment Change Report showed private sector payrolls rose by 571,000 jobs in October, above the Bloomberg forecast calling for a 400,000 gain. September’s rise of 568,000 jobs was revised to a 523,000 increase. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader October nonfarm payroll report, expected to show headline employment grew by 450,000 jobs and private sector jobs rose by 415,000 (economic calendar).The unemployment rate is forecasted to dip to 4.7% and average hourly earnings are projected to rise 0.4% month-over-month (m/m) and be up 4.9% y/y.

The October Institute for Supply Management (ISM) Services Index showed expansion in the key services sector (a reading above 50) unexpectedly jumped to a record high of 66.7 from September’s 61.9 reading, and versus estimates of an increase to 62.0. The record-setting read came as growth in new orders and business activity increased, moving closer to 70, whereas employment growth saw a modest deceleration. Meanwhile, new export orders increased, moving above 60 and prices paid continued to grow sharply, moving above the 80 mark and registering the second highest reading ever. The ISM said that demand shows no signs of slowing but service businesses are struggling to stock up as inventory sentiment was near record lows.

The final Markit U.S. Services PMI Index for October was revised slightly higher to 58.7 from the preliminary estimate of 58.2, where it was expected to remain. The index was up from September’s 54.9 figure. A reading above 50 denotes expansion. Markit’s release is independent and differs from the ISM report, as it has less historic value and Markit weights its index components differently, while its survey respondents include those that vary more in size, including small and medium-sized companies.

The MBA Mortgage Application Index declined 3.3% last week, following the prior week’s increase of 0.3%. The drop came as a 4.3% fall for the Refinance Index was met with a 1.6% decline for the Purchase Index. The average 30-year mortgage rate fell 6 basis points (bps) to 3.24%.

Factory orders rose 0.2% month-over-month (m/m) in September, versus estimates of a 0.1% gain, and compared to August’s downwardly-revised 1.0% increase. Durable goods orders—preliminarily reported last week—were positively revised at a 0.3% decrease for September, and excluding transportation, orders were also favorably-adjusted to a 0.5% advance. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were unrevised at a 0.8% rise.

Treasuries finished lower following the Fed’s announcement, as the yield on the 2-year note was up 1 bp at 0.46%, while the yield on the 10-year note increased 3 bps to 1.58%, and the 30-year bond rate moved 4 bps higher to 2.00%.

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