U.S. Equities Jump after Fed Decision…..
U.S. equities finished with solid gains after the Federal Reserve left rates unchanged, but doubled the amount that it will begin to taper its asset purchases. Investors were also given a host of economic data to sift through, which showed November retail sales rose at a much slower pace than expected, import prices came in hotter than anticipated, and mortgage applications fell, but home builder sentiment improved, business inventories rose more than forecasted, and New York manufacturing growth unexpectedly accelerated. In equity news, Eli Lilly and Company raised its full-year guidance, and Vir Biotechnology announced data showing that is COVID-19 antibody therapy, developed with partner GlaxoSmithKline, was effective in combating the omicron variant. Treasuries finished lower, with yields seeing modest increases, and the U.S. dollar ticked to the downside, while gold and crude oil prices reversed course to finish on the plus side. Europe and Asia were mixed ahead of today’s Fed decision, which precedes tomorrow’s announcements from the European Central Bank, the Bank of England, and the Bank of Japan.
The Dow Jones Industrial Average increased 383 points (1.1%) to 35,927, the S&P 500 Index jumped 76 points (1.6%) to 4,710, and the Nasdaq Composite rallied 328 points (2.2%) to 15,566. In heavy volume, 4.8 billion shares of NYSE-listed stocks were traded, and 5.2 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.14 higher to $70.87 per barrel. Elsewhere, the gold spot price gained $6.40 to $1,778.70 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 96.38.
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. However, the FOMC doubled the amount it will taper its asset purchases to $30 billion per month—$20 billion in Treasuries and $10 billion in mortgage-backed securities. The move comes “in light of inflation developments and the further improvement in the labor market.” Further, “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, removing the “transitory” language from its statement, while also indicating that job gains have been solid in recent months, and the unemployment rate has declined substantially.
The Committee also provided updated economic projections, showing downward adjustments to GDP and the unemployment rate, while increasing its forecast for inflation for 2021 and 2022. In the Committee’s “dots plot”—participants’ assessment of interest rates going forward—the majority of the Members expect at least three rate hikes next year. Shortly after the announcement in his customary press conference, Chairman Jerome Powell reiterated the change to its forecast for rate hikes in the future, noting that the Committee expects a gradual rate of policy firming, but added that he doesn’t anticipate any increase in rates before ending its tapering process, but it could hike rates before reaching full employment.
Advance retail sales for November rose by 0.3% month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.8% increase, and compared to October’s upwardly-adjusted 1.8% rise. Last month’s sales ex-autos also gained 0.3% m/m, compared to expectations of a 0.9% gain and as October’s figure was revised higher to a 1.8% increase. Sales ex-autos and gas were up 0.2% m/m, versus estimates of a 0.8% rise, while October’s reading was adjusted upward to a 1.6% gain. The control group, a figure used to calculate GDP, dipped 0.1% m/m, versus projections of a 0.7% increase, and following October’s favorably-revised 1.8% rise. Sales of motor vehicles dipped, and fell for electronics and appliances, as well as for health and personal care, while non-store retail sales—including online activity—were flat. Sales rose at gasoline stations, clothing stores, and building material and supplies dealers.
The Import Price Index increased 0.7% m/m for November, versus estimates of a 0.6% gain, and compared to October’s upwardly-revised 1.5% increase. Versus last year, prices were up by 11.7%, compared to forecasts of an 11.4% increase and October’s upwardly-revised 11.0% rise.
The Empire Manufacturing Index, a measure of activity in the New York region, showed the index unexpectedly moved further into a level depicting expansion (a reading above zero). The index rose to 31.9 in December from 30.9 that was posted in November, and compared to estimates of a decrease to 25.0. The surprising increase came even as growth in new orders and employment both decelerated, along with the expansion in inventories, while prices paid decreased but continued to be severely elevated.
The National Association of Home Builders (NAHB) Housing Market Index showed home builder sentiment in December improved to 84 from October’s 83 level, in line with estimates. The NAHB said, “Despite inflation concerns and ongoing production bottlenecks, builder confidence edged higher for the fourth consecutive month on strong consumer demand and limited existing inventory.” However, the report noted that while demand remains strong, finding workers, predicting pricing and dealing with material delays remains a challenge.
Business inventories rose 1.2% m/m in October, just above forecasts of a 1.1% rise and compared to September’s upwardly-revised 0.8% increase. Business inventories have increased for fifteen-straight months.
The MBA Mortgage Application Index fell 4.0% last week, following the prior week’s gain of 2.0%. The decline came as a 6.4% drop for the Refinance Index more than offset a 0.7% rise for the Purchase Index. The average 30-year mortgage rate remained at 3.30%.
Treasuries moved lower following the Fed’s decision, as the yield on the 2-year note was up 3 basis points (bps) at 0.69%, the yield on the 10-year note advanced 3 bps to 1.47%, and the 30-year bond rate was 2 bp higher at 1.85%.
©2021 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.
Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.