Treasurys, Stocks Rally Following Fed Decision and Commitment to Gradual Hikes

As widely anticipated, the Federal Reserve made the decision to increase its benchmark borrowing rate by 25 basis points today for the second time in the last three months and third rate hike in over a decade, bringing the target range to 0.75% – 1.0%.  In its statement released afterwards, the Federal Open Market Committee confirmed its previous projections for two more quarter-point hikes in 2017 and three moves in 2018, along with a marginal increase in the expected median fed funds rate for 2019 to 3%.  The Fed’s “gradual” approach to tightening monetary policy was supported by “confidence in the path the economy is on,” which the committee stated that “if we continue to feel that, we will likely regard it as appropriate to make some further moves to scale back accommodation.”  Risks to the economy were regarded as “roughly balanced,” and inflation over the past year was observed to be “moving close” to the Fed’s long-term objective of 2%.  Addressing the unwinding of the Fed balance sheet, central bankers reiterated plans to maintain the current policy. 

Treasurys rallied immediately following the Fed’s less hawkish than expected rate decision/statement/press conference, with yields/swaps rates dropping 6-13 bps across the curve as the yield on the 10-year note touched below 2.50% (-10 bps).  Equity markets similarly welcomed the announcement, as reflected in all three major US stock indices up in the range of 0.5% – 0.75% for the session, led by a jump in energy stocks, whose shares benefitted from a 2.25% rebound in crude oil prices.  WTI crude gained $1.13 on the day to $48.85/barrel while Brent crude increased $0.93 to $51.85/barrel.            

A wave of economic data crossed the wire this morning, beginning with the Labor Department’s consumer price report which displayed the largest yearly increase in five years at 2.7%.  During the month of February, the cost of living in the US rose 0.1% (no change expected) as growth in recreation and clothing (+0.6%) expenses offset a decrease in energy costs (-1.0%).  Core consumer prices rose 0.2% for the month, in-line with median forecasts.  Combined with yesterday’s PPI figures, the consumer price data projects a modest 0.2% rise in core PCE inflation, the Fed’s preferred measure of inflation which is set to be released at the end of the month.

Retail sales in February edged higher, up 0.1% following a revised 0.6% gain in the previous month.  The headline figure represents the lowest growth in six months as auto sales, which generally comprise 20% of consumer spending, fell 0.2% during the month.  Online shopping (+1.2%) produced robust monthly gains as did building suppliers to help offset contraction in 9 of the 13 major retail categories.  A delay in consumer tax refunds was pointed to as a potential factor in the slowed sales growth, which if accurate, could foreshadow a rebound in March’s retail data.

A separate report released today showed confidence among home builders at its highest level since June 2005.  The National Association of Home Builders’ housing market index showed a 71 reading for March, six points higher than the previous month.  Improved sales conditions and increased buyer traffic highlighted the survey, however the surging confidence has yet to generate a meaningful boost in housing starts in early 2017.