Markets React to Fed and BoJ Inaction

US stocks trade mixed while Treasury yields are down marginally across the curve as markets react to the decisions by both the Fed and Bank of Japan not to change rate policy.  Yesterday’s Fed announcement was largely in line with market expectations.  The statement removed the warning of global risks, while acknowledging a slowdown in US growth.  Some interpreted the Fed’s description of the economy as slightly more hawkish than the March statement.  While technically the door for a June hike was left open, there was nothing in the language to suggest that a hike is imminent in the near-term.  The Fed appears content to wait for stronger economic data to justify its next hike.  Kansas City Fed President George was the lone dissenter for the second consecutive meeting, preferring to raise rates by 25 bps immediately. 
 
Overnight, risk assets reacted negatively after the Bank of Japan disappointed investors by holding off on expanding monetary stimulus at their policy meeting.  Most market pundits had expected an increase in the BoJ’s monthly asset purchase program and an even further cut into negative interest rate territory.  Instead, the BoJ opted to take more time to assess the impact of negative rates and again pushed back the timing of when it expects to achieve its 2% inflation target.  The yen gapped up over 2% versus the dollar in response, while the Nikkei fell 3.6%.
 
In terms of data, today’s release of first quarter GDP showed the US economy stalled in the first three months of the year.  Economic growth slowed to an annualized pace of 0.5%, down from 1.4% in the 4th quarter, and narrowly missing the 0.7% economists were expecting.  The 0.5% increase was the weakest since the first quarter of 2014, held down by a drop in business fixed investment.  On the bright side, some of the weakest aspects of the Q1 GDP report were concentrated in the beleaguered energy sector, which has shown signs of stabilization in recent weeks.  Economists expect activity to pick up in Q2, as the benefits of a more stable market, a weaker dollar and higher oil prices take hold.

The S&P 500 and NASDAQ are currently trading close to unchanged on the day, while the Dow is down nearly 0.50%.  Treasury yields and swap rates are 1-2 bps lower across all major maturities, while WTI crude is up over 1% and approaching $46/barrel.