Stocks Rebound, Dollar Rises as Markets Digest Fed Decision

Risk Assets Regain Steam

The risk-off sentiment that followed yesterday’s Fed announcement proved to be short-lived, as today equity markets regained their footing and Treasury yields drifted higher.  Major stock indices finished with gains of 0.21%-0.65%, led by strength in the tech sector.  US Treasurys maintained a modest selloff throughout the trading session, and yields/swap rates closed 1-2bps higher across the curve.  Tomorrow’s release of the PCE price index (Fed’s preferred measure of inflation) will be closely watched by financial markets, especially as Fed Chair Jerome Powell expressed doubt towards an overheating of consumer prices.  The US dollar had a strong day against other major currencies (+0.85%), highlighted by a 0.6% rise against the euro after government budget concerns in Italy escalated overnight.  In commodity markets, crude oil futures trended higher (against the best wishes of President Trump), as WTI crude climbed 0.7% to $72/barrel.

What’s in a Word?

Looking back at the conclusion of yesterday’s FOMC meeting, perhaps the most scrutinized portion of the announcement and press conference afterwards was the removal of the word “accommodative” from the Fed’s statement.  The initial market reaction to the striking of the word was the assumption that the Fed was beginning to separate itself from the hiking cycle that dated back to December 2015 and resulted in eight quarter point hikes that has brought benchmark borrowing rates in the US to their current levels.  Fed Chair Jerome Powell changed that perception when he explained that “it wasn’t because policy’s not accommodative. It is still accommodative”.  Ultimately, the Fed believes that it no longer needs to provide support to the economy via verbal forward guidance and that the economy’s performance and data will speak for itself.  “The question we are answering is, how do we provide the economy just the right amount of support – not too much, not too little – to sustain the recovery and achieve our statutory goals” Powell stated.  In the end, economic data metrics may stand to have a much larger impact on financial markets than they have in the recent past.

Key economic data releases today were headlined by durable goods orders, which rose by a robust seasonally adjusted 4.5% in August. It was the largest monthly gain since February and far exceeded expectations of +2.2%. The jump in the headline number was mostly attributed to a surge in the volatile civilian aircrafts component (+69.1%) that outweighed a 1% decline in automobiles and parts.  Core capital goods orders (nondefense, excluding aircrafts) declined 0.5% (+0.4% expected), albeit had increased strongly in the prior two months.  The metric is closely tied to business investment, and when compared to the first eight months of 2017, is up 7.4% — a very positive sign for the economy.

Weekly initial jobless claims were also released today, holding near 49-year lows.  The number of Americans filing for unemployment for the first time climbed to a seasonally adjusted 214,000 last week (202k week prior).  The four-week moving average of claims also remained near the lowest level in nearly a half a century, at 206,250, reflective of the continued tightening in the labor market.  Separately, continuing claims increased by 16,000 to 1.661 million for the week ended September 15th.