U.S. stocks rallied, sending benchmark indexes to the highest levels since 2007, silver and gold surged while the dollar weakened as the Federal Reserve said it will buy mortgage securities to bolster the economy.
The Standard & Poor’s 500 Index climbed 1.6 percent to 1,459.99 at 4 p.m. in New York and rates on mortgage bonds tumbled to record lows. Ten-year Treasury yields slipped three basis points to 1.73 percent after rising as much as seven points earlier. Oil climbed 1.3 percent to $98.31 a barrel, a four-month high, while gold jumped to the highest price since February. The Dollar Index, a gauge of the currency against six peers, fell 0.6 percent to the lowest level since May.
The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month and hold the federal funds rate near zero “at least through mid-2015.” The central bank’s policy-setting committee said it will continue its purchases and undertake other efforts to help the labor market if the outlook for employment does not improve.
“What the market didn’t expect was having this labor market kicker,” John Canally, an economist and investment strategist at LPL Financial Corp. in Boston, said in a telephone interview. The firm oversees about $350 billion. “They’ve targeted the unemployment rate, which was outside the band of what the market was expecting,” he said. “That’s what is adding to the risk-on trade here.”
Gauges of commodity producers and financial stocks rose more than 2.5 percent to lead gains as all 10 of the main industry groups in the S&P 500 advanced at least 1 percent. Bank of America Corp., JPMorgan Chase & Co., American Express Co. and Alcoa Inc. jumped at least 3 percent to lead gains in all 30 stocks in the Dow Jones Industrial Average, which jumped 206.51 points to 13,539.86.
JPMorgan, which plunged as much as 24 percent in the month after disclosing a multibillion-dollar trading loss, has erased that drop with today’s gain.
Pall Corp. rallied 8 percent as it reported quarterly earnings that topped analysts’ estimates. Apple Inc. climbed 2 percent to a record after yesterday introducing a new version of the iPhone that has a bigger screen, a faster chip and access to speedier wireless networks. Northrop Grumman Corp. slipped 1.4 percent after UBS AG cut the stock to sell, saying the company is “most exposed” to U.S. budget cuts.
Both the S&P 500 and the Dow today climbed above their highest closing levels since December 2007, two months after both gauges set record highs.
Mortgage-bond yields tumbled to unprecedented lows, signaling home-loan rates may fall to new records, after the Fed announcement. Yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value declined 18 basis points to 2.18 percent as of 3 p.m. in New York, according to data compiled by Bloomberg. The gap with an average of five- and 10-year Treasury rates narrowed 16 basis points to about 98 basis points, or the lowest since 1992.
Previous efforts by the Fed to safeguard the U.S. economic recovery have helped extend a rally in stocks over the last three years. The S&P 500 has rebounded 116 percent from a bear-market low in March 2009.
The Fed fought the financial crisis by keeping the main interest rate close to zero since December 2008 and through two rounds of quantitative easing. In the first round starting in 2008, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.
The actions also helped send rates on U.S. government securities to record lows. The 10-year note’s yield touched an all-time low of 1.38 percent in July, while 30-year bond rates sank as low as 2.44 percent the same month. Thirty-year rates increased two basis points to 2.94 percent today.
Fed Chairman Ben S. Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he has called a “grave concern.” The decision risks provoking a renewed backlash from Republicans, including presidential nominee Mitt Romney, who say Bernanke’s policies threaten to ignite inflation while doing little to spur the economy.
A Labor Department report released today before the Fed’s statement showed jobless claims increased 15,000 in the week ended Sept. 8, the biggest gain in almost two months, to 382,000. The median forecast of 50 economists surveyed by Bloomberg called for 370,000 claims. Tropical Storm Isaac resulted in about 9,000 applications for benefits, the agency said.
Fed policy makers said economic growth will improve faster than they had earlier projected as they upgraded their estimate for next year to 2.5 percent to 3 percent.
“We’re not sure what the economic effects of this program will be,” Dan Greenhaus, chief global strategist at BTIG LLC in New York, wrote in a note to clients. “It should help growth and employment on the margin -- but of all the announcements the Fed could have made today, this is very nearly one of the most accommodative that could have been reasonably expected.”
The dollar weakened against 13 of 16 major currencies, with the euro increasing 0.7 percent to a four-month high of $1.2991. The dollar dropped 0.5 percent to 77.51 yen and touched 77.13, the lowest since February. The franc weakened 0.5 percent against the euro as it fell against 12 of 16 major peers. The Swiss central bank vowed to keep defending the franc by buying foreign currencies in “unlimited quantities.”
European markets closed before the Fed’s statement. The Stoxx Europe 600 Index lost 0.2 percent, retreating from its highest level since July 2011, as European Aeronautic, Defence & Space Co. and BAE Systems Plc slid more than 7 percent after announcing plans to merge.
Barclays Plc said that shareholders of EADS and BAE may adjust their positions following yesterday’s announcement of a combination. EADS, the parent of Airbus SAS, would control 60 percent of the new entity, with London-based BAE owning the rest, the companies said yesterday.
Next Plc slumped 7.2 percent, its biggest decline in more than two years, as the U.K.’s second-largest retailer said that trading in August and early September was “unusually quiet.” A gauge of lenders contributed the most to the Stoxx 600’s decline.
The European Central Bank’s pledge to buy government bonds may mean that “in the end, action is not needed,” Governing Council member Panicos Demetriades said in Nicosia. German Finance Minister Wolfgang Schaeuble discouraged Spain from seeking a full international bailout, saying another request for aid risked a fresh round of financial-market turmoil.
“I’m not in the camp that says ‘take the money,’” Schaeuble said in an interview in Berlin today, when asked about French moves to press Spanish Prime Minister Mariano Rajoy’s government to ask for more aid. Spain “would be daft” to ask for a bailout on top of the 100 billion euros ($129 billion) for its banks if it didn’t need it.
In Australia, Fortescue Metals Group Ltd., the country’s third-biggest iron ore producer, dropped 14 percent as the Australian Financial Review reported it sought a debt covenant waiver from its lenders for the next 12 months.
Silver, gold and lead jumped more than 1.5 percent to lead gains in 16 of 24 commodities tracked by the S&P GSCI Index, which jumped 0.7 percent to the highest since May. Gold futures for December delivery rose 2.2 percent to settle at $1,772.10 an ounce and touched $1,775, the highest since Feb. 29.
The MSCI Emerging Markets Index increased 0.7 percent, rising for a sixth straight day in its longest rally of the year. The Shanghai Composite Index dropped 0.8 percent after the official Xinhua News Agency said massive stimulus measures would be “detrimental” to sustainable growth and as China’s central bank issued 28-day reverse-repurchase contracts for the first time in a decade, damping speculation reserve requirements will be cut.