Early Gains Evaporate After Fed Decision…..

U.S. equities turned lower, accelerating to the downside in the final hour of trading to finish mixed, after the Federal Reserve hinted that its first rate hike since 2018 could be in the near future, saying such a move could happen “soon.” The announcement came amid elevated concerns the Central Bank may have to be more aggressive to combat persisting inflation, a major catalyst to the recent volatility in the markets. Earnings season continued to shift into high gear, with Dow member Microsoft Corporation topping expectations and offering upbeat guidance for its key Azure unit, while Dow component Boeing Company posted a much larger-than-expected loss due to sizable charges regarding its troubled 787 program, and AT&T bested the Street’s Q4 expectations, but revenues fell. In other economic news, new home sales jumped and wholesale inventories grew more than expected, while mortgage applications slid as mortgage rates continued to rise, and the advance goods trade deficit unexpectedly widened. Treasuries moved lower, showing a noticeable rise in yields, and the U.S. dollar was higher, while crude oil prices gained ground, and gold tumbled. Europe finished higher ahead of the Fed’s decision, extending yesterday’s rebound, and despite the geopolitical concerns in the region, while markets in Asia were mixed.

The Dow Jones Industrial Average fell 130 points (0.4%) to 34,168, the S&P 500 Index lost 7 points (0.2%) to 4,350, while the Nasdaq Composite ticked 3 points higher to 13,542. In very heavy volume, 5.5 billion shares of NYSE-listed stocks were traded, and 5.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.75 to $87.35 per barrel. Elsewhere, the gold spot price dropped $37.00 to $1,815.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.6% to 96.50.

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, it hinted at the possibility of its first rate hike since 2018 being around the corner, saying, “With inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds.” As well, in its statement of “Decisions Regarding Monetary Policy Implementation,” the Committee said it expects its balance sheet reduction “will commence after the process of increasing the target range for the federal funds rate has begun.”

The FOMC also said it will continue to taper its asset purchases at a rate of $30 billion per month—$20 billion in Treasuries and $10 billion in mortgage-backed securities. Regarding the economy, the Fed stated that activity and employment have continued to strengthen, and that while the sectors most adversely affected by the pandemic have improved in recent months, they continue to be affected by the recent sharp rise in COVID-19 cases. Additionally, it said job gains have been solid and the unemployment rate has declined substantially, while the “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.” No updated economic projections were given at this meeting.

Shortly after the announcement in his customary press conference, Chairman Jerome Powell noted that while he expects inflation to decrease during the year, the risks remain to the upside and that he sees “progress” in the supply-chain issues in the second half of 2022. Additionally, Powell indicated that asset purchases are likely to end in March. Get more insight on the Fed’s decision from Schwab’s Liz Ann Sonders later today on our Market Insights page.

New home sales (chart) jumped 11.9% month-over-month (m/m) in December to an annual rate of 811,000 units, well above forecasts calling for a rate of 760,000 units, and compared to November’s negatively-revised 725,000-unit level. The median home price rose 3.4% y/y to $377,700. New home inventory fell to 6.0 months from November’s level of a 6.6-months supply at the current sales pace. This was the highest level of sales since March 2021 as sales surged m/m in the Midwest and jumped in the South, more than offsetting a drop in the Northeast and relatively flat sales in the West. However, sales in all regions were down solidly y/y, except for in the West, which were up modestly. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales,which are based on closings.

The MBA Mortgage Application Index fell 7.1% last week, following the prior week’s increase of 2.3%. The decrease came as a 12.6% drop for the Refinance Index was met with a 1.8% decline for the Purchase Index as the average 30-year mortgage rate continued to climb, rising 8 basis points (bps) to 3.72%.

The advance goods trade balance showed that the December deficit unexpectedly widened, coming in at $101.0 billion, versus the Bloomberg consensus estimate calling for it to contract to $96.0 billion from November’s upwardly-revised shortfall of $98.0 billion.

Preliminary wholesale inventories jumped 2.1% month-over-month (m/m) for December, compared to expectations of a 1.2% gain, and versus November’s upwardly-revised 1.4% increase.

Treasuries moved noticeably lower following the Fed’s decision, as the yield on the 2-year note jumped 11 bps to 1.13%, the yield on the 10-year note rose 7 bps to 1.85% and the 30-year bond rate increased 4 bps to 2.17%.

Tomorrow’s economic calendar will be robust, beginning with weekly initial jobless claims for the week ended January 22, forecasted to show 265,000 first-time unemployment applications were filed, as well as the preliminary look at December durable goods orders, expected to have declined 0.6% m/m, while orders ex-transportation are anticipated to have increased 0.4% m/m, and orders for nondefense capital goods excluding aircraft, a proxy for business spending, is projected to also have gained 0.4% m/m. The first look (of three) at Q4 Gross Domestic Product (GDP) is also due out, with economists calling for an annualized quarter-over-quarter (q/q) expansion of 5.5% and personal consumption to have advanced 3.3%, while the GDP Price Index and the core PCE Price Index are expected to show respective increases of 6.0% and 4.9% q/q. After the opening bell, pending home sales will be released, expected to show the pipeline of existing home sales fell 0.5% m/m, and the Kansas City Fed Manufacturing ActivityIndex will round out the busy day, forecasted to have ticked lower to a level of 22 for this month from December’s 24, with a reading above zero indicating growth in activity.

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