Markets React to Yesterday’s Hawkish FOMC Announcement and Mixed Economic Data

Stocks, commodities, Treasuries, and swap rates all sold off as markets reacted to yesterday’s more hawkish-than-expected FOMC announcement.  While still expressing concern about domestic growth rates and global flare ups, and without mounting inflation pressure, the Fed appears to have boxed themselves into a greater likelihood of finally making their first move in December, after a 7 year 0% short term rate policy.  Their October 28th policy release (see below linked policy release with side by side language changes) put the December target date directly in scope.  They didn’t commit to making a change at the December 16th final meeting of the year, but they certainly didn’t diffuse expectations of the move happening then either.  Market estimates jumped from a less than 1 in 3, to over a 50% chance that the Fed does make their first move in December.

Aside from the fallout from the Fed, markets digested a variety of economic releases, corporate activity, and supply.  Staying consistent with the recent trend, US economic data was mixed.  The headline GDP number was a disappointment, indicating the US economy only expanded at a 1.5% annual rate in the 3rd quarter.  It was a narrow miss from the 1.6% consensus estimate, but considerably below the 3.9% pace in the second quarter.  The swing between quarters was largely caused by a reduction in inventories, which subtracted 1.44% from the headline number.  It’s worth mentioning that consumer spending, which accounts for 70% of the US economy, remained quite strong at a 3.2% annualized pace.  Other data showed sales of previously owned homes unexpectedly fell, while applications for jobless benefits were little-changed, sticking near 1970s-era lows.

Today’s corporate earnings include Baidu, First Solar, LinkedIn, and Starbucks among others after the close.  In terms of supply, Microsoft is scheduled with a seven-part offering and the US Treasury is set to auction $29 billion 7-year notes.