Risk Assets Surge, Dollar Plummets After Dovish Fed

After starting the day softer, US stocks advanced to their highest level of 2016 in the afternoon while Treasuries fluctuated in a narrow range as bullish sentiment carried over from yesterday’s more dovish than expected Fed statement/comments. The FOMC voted to leave interest rates unchanged, which was widely-anticipated by market pundits, but the downward revisions to the Fed’s interest rate projections caught many people off guard.  The revised median “dot plot” forecast showed two hikes this year as opposed to the previous median forecast of four.  The Committee noted that the US economy has held up relatively well despite the recent volatility in financial markets, however, “global economic and financial developments continue to pose risks”.  Kansas City Fed President George, a known hawk, cast the lone dissenting vote, preferring to raise the target funds rate by 25 bps.

Despite the Fed’s cautious tone, US economic data released today supported the notion that the domestic economy continues to stand on solid footing.  Jobless claims climbed less than forecast last week to 265,000, only 10,000 higher than the forty-year low reached in mid-July.  Claims have now been below 300,000 for 54 consecutive weeks, the longest stretch since 1973 and consistent with a healthy labor market.  Separate reports showed factory activity in the mid-Atlantic region surged to a nine-month high this month and the JOLTS report showed job openings rose to a six-month high in January.  That data should further reduce fears of a looming recession and helps build the case for Fed action at the April or June FOMC meeting.
 
Both the Dow and S&P 500 are rallying close to 1%, the NASDAQ a little less so, WTI crude is up 4%, crossing the significant $40/barrel threshold, and Treasury yields and swap rates are largely unchanged after rallying 5-7 bps yesterday afternoon.