U.S. stocks surged, sending benchmark indexes to record highs, while Treasuries fell as the Federal Reserve expressed enough confidence in the labor market to taper asset purchases while still promising to hold interest rates close to zero. Commodities and the dollar advanced.
The Standard & Poor’s 500 Index rose 1.7 percent to 1,810.65, its biggest gain in two months, and the Dow Jones Industrial Average soared 292.71 points to 16,167.97 by 4:30 p.m. in New York. The benchmark gauge of U.S. equity volatility dropped the most since October. Ten-year Treasury yields added four basis points to 2.88 percent. The greenback jumped to a five-year high versus the yen and climbed versus most major peers. Gasoline and coffee drove gains in commodities.
The Fed announced plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step toward unwinding the unprecedented stimulus put in place by outgoing Chairman Ben S. Bernanke to help the economy recover from the worst recession since the 1930s. Fed officials predicted the unemployment rate will fall to as low as 6.3 percent by the end of next year, compared with a September projection of 6.4 percent to 6.8 percent.
“The market likes the news,” Jeffrey Kleintop, chief market strategist at LPL in Boston, which manages about $400 billion, said in a phone interview. “This was very small, more of a test than a taper at just $10 billion. This really suggests the Fed is going to be cautious moving forward. Going from $85 billion to $75 billion is not a big deal, so that’s encouraging.”
About 34 percent of economists surveyed by Bloomberg Dec. 6 had predicted that the Fed would start paring bond buying this month, up from 17 percent in a Nov. 8 poll.
The central bank today left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
The panel added that it “likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.
Fed stimulus has helped propel gains of more than 165 percent in the S&P 500 from a 12-year low reached in March 2009 and put the gauge on track for its best annual performance since 1997.
Speculation over a reduction in bond buying has whipsawed equities since May, when Bernanke first indicated cuts to the program could start this year. The S&P 500 tumbled 5.8 percent from a record May 21 through June 24. After the Fed unexpectedly refrained from tapering following its Sept. 17-18 meeting, the gauge extended its rally to set record highs.
The index had retreated 1.5 percent through yesterday from its latest record reached Dec. 9, as improving economic data fueled speculation the Fed would deem growth sufficient enough to withdraw some support. The S&P 500 is up 27 percent this year, the most since surging 31 percent in 1997.
Health-care, financial, consumer staple and energy shares rose more than 1.6 percent for the biggest gains among the 10 main S&P 500 industry groups today. Exxon Mobil Corp., 3M Co. and JPMorgan Chase & Co. rallied at least 2.7 percent to lead the Dow’s advance.
Lennar Corp. climbed 6.3 percent after the homebuilder reported earnings that topped estimates. An S&P gauge of builders jumped 4.2 percent as all 11 companies in the index advanced.
A Commerce Department report today showed U.S. housing starts jumped 22.7 percent to a 1.09 million annualized rate, exceeding all forecasts of economists surveyed by Bloomberg and the most since February 2008. Permits for future projects held near a five-year high, indicating the pickup will be sustained into 2014.
The Chicago Board Options Exchange Volatility Index, the benchmark gauge of options prices know as the VIX, sank 15 percent to 13.80 for its biggest decline since Oct. 16. The VIX, which moves in opposite direction of the S&P 500 about 80 percent of the time, had risen for 14 of the past 16 trading days, the first time that has ever occurred.
Futures on Japan’s Nikkei 225 Stock Average jumped 4.2 percent to 15,895 on the Chicago Mercantile Exchange, after closing at 15,590 yesterday in Japan. Contracts on Australia’s S&P/ASX 200 Index climbed 1.1 percent, while futures on the Kospi Index in South Korea rose 0.9 percent in their most recent trading session. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in New York jumped 1.7 percent.
Coffee, gasoline, heating oil and gas oil all rallied more than 0.9 percent to lead gains in 10 of the 24 commodities in the S&P GSCI Index of raw materials prices, while soybeans, wheat and gold dropped at least 0.9 percent for the biggest declines.
West Texas Intermediate oil climbed 0.6 percent to $97.80 a barrel. The U.S. Energy Information Administration said crude stockpiles decreased 2.94 million barrels to 372.3 million last week. Inventories were forecast to slip 3.5 million barrels, according to the median of nine analyst estimates in a survey before the report.
Treasury yields increased earlier in the U.S. session as the government sold $35 billion in five-year notes at a yield of 1.6 percent, compared with a forecast of 1.57 percent in a poll of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.42, the least since August.
The benchmark 10-year Treasury yield, which influences rates on everything from mortgages to corporate debt, has more than doubled since reaching a record-low 1.379 percent in July 2012. It’s still less than the average over the past decade of 3.50 percent.
Markets in Europe closed before the Fed’s announcement.
The Stoxx Europe 600 Index climbed 0.9 percent, erasing yesterday’s drop and reaching a one-week high. Electrolux AB, a maker of ovens and dishwashers, jumped 3.5 percent after a report showed U.S. shipments of appliances surged last month. Elektrobit Corp. advanced 6.7 percent after the Finnish maker of software products for cars increased its earnings forecast.
Technip SA lost 6.3 percent after the French oilfield-services company said it expects a weaker profit margin at its subsea division next year.
The pound climbed 0.8 percent to $1.6401, after declining 1.1 percent over the previous five days.
The U.K. jobless rate in the three months through October measured by International Labour Organization methods declined to 7.4 percent from 7.6 percent in the quarter through September, the Office for National Statistics said in London today. The median forecast of 32 economists was for the rate to stay unchanged at 7.6 percent.
Germany’s 10-year bund yield rose two basis points to 1.85 percent. The Ifo institute German business climate index, based on a survey of 7,000 executives, increased to 109.5 in December from 109.3 in November. That matched the median prediction of 39 estimates in a survey.
The Bloomberg U.S. Dollar Index, a gauge of the currency against 10 major peers, rallied 0.5 percent, the biggest one-day gain since Nov. 8.
The yen weakened as much as 1.5 percent to 104.21 per dollar, the lowest intraday level since October 2008. Japan’s currency, viewed as a haven by some investors, slid at least 0.3 percent against all 16 major counterparts. The Asian nation’s merchandise trade deficit for November was 1.35 trillion yen on a seasonally-adjusted basis, compared with the 1.2 trillion yen median estimate in a Bloomberg News survey.
The yen has tumbled 15 percent this year, the worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The euro has risen 8.4 percent and the dollar advanced 4 percent.
The Bank of Japan, which starts a two-day meeting Dec. 19, sees significant scope to boost government bond purchases if needed to achieve its inflation target, according to people familiar with the discussions. The BOJ buys more than 7 trillion yen of the nation’s bonds every month to battle deflation.
Turkish stocks erased earlier losses, sending the benchmark up 0.7 percent after dropping as much as 3.9 percent today and closing 5.2 percent lower yesterday. The sons of two cabinet ministers and the chief executive officer of the country’s largest listed state-owned bank were arrested as part of a corruption probe.
India’s S&P BSE Sensex Index advanced 1.2 percent to a one-week high after the nation’s central bank unexpectedly left its policy interest rate unchanged.
The Indonesian rupiah depreciated 0.4 percent to its weakest level in five years on concern a planned ban on ore exports will worsen the country’s current-account deficit. Thailand’s baht weakened as much as 0.7 percent against the dollar as investors weighed the outcome of the Fed’s monetary policy meeting.