U.S. Stocks Climb With Bonds, Crude as Dovish Fed Sinks Dollar

Janet Yellen's Statement in Two Minutes
  • Fed holds steady on rates, see slower path for increases
  • Weaker greenback fuels commodity share gains as banks fall

The Federal Reserve’s signal that interest rates won’t rise as fast as officials previously forecast propelled U.S. stocks to their highest level this year, sparking a rally in Treasuries, while sinking the dollar.

Commodity shares drove the Standard & Poor’s 500 Index’s first day of gains this week, reducing its retreat this year to less than 1 percent after the Fed pared back the number of rate increases it anticipates enacting in 2016. Financial shares fell, however, as lower borrowing costs damp banks’ profit prospects. Emerging-market assets reversed declines, the Bloomberg Dollar Spot Index had its biggest drop since Feb. 3, and yields on two-year Treasury notes fell by the most in five weeks. U.S. crude oil surged 5.8 percent.

“By guiding lower on inflation expectations as well as their median forecast, the signal for the market has now been shifted to a more dovish stance,” said Chad Morganlander, a money manager at Stifel, Nicolaus & Co. in Florham Park, New Jersey. “Investors in the short term will look at it as a bullish signal for the overall market. It moves the Fed in a position of being more accommodative, which will soften the dollar.”

Fed officials cited the potential impact from weaker global growth and financial-market turmoil on the U.S. economy for keeping the target range for the benchmark federal funds rate at 0.25 percent to 0.5 percent. The central bank lowered its median projection for U.S. growth in 2016 and next year, and the median of policy makers’ quarterly projections implies two 25 basis-point increases this year, down from four forecast in December.

Weaker-than-forecast global expansion has clouded the U.S. outlook and led investors to expect a slower pace of tightening since the Fed raised rates in December for the first time in almost a decade. Chair Janet Yellen said in February that market turbulence had “significantly” tightened financial conditions by pushing down stock prices, spurring the dollar to strengthen and boosting some borrowing costs.

The Fed meeting was the third major central-bank policy event since Thursday, following an unprecedented stimulus package unleashed by the European Central Bank, and after the Bank of Japan held off from adding more to its record stimulus. The Bank of England meets Thursday.

Stocks

The S&P 500 rose 0.6 percent to 2,027.22 as of 4 p.m. in New York, closing at its highest level since Dec. 31 as sub-groups of mining and energy shares rallied at least 1.6 percent. The benchmark index has climbed 11 percent from a February low, though it remains 4.9 percent below its all-time high touched last May.

“What the market wants is enough monetary accommodation to accelerate growth, but not so much monetary accommodation that inflation gets out of hand,” Jeff Korzenik, the Chicago-based chief investment strategist at Fifth Third Bancorp., said by phone. The firm oversees $26 billion. “The market is walking the same fine line the Fed has to walk. Market participants have a little more preference for easier monetary policy.”

Financial shares slipped 0.2 percent, while health-care companies lost 0.3 percent.

A report Wednesday showed consumer prices excluding food and fuel in the U.S. climbed more than forecast in February for a second month. Separate data showed new-home construction rose more than economists forecast during the same period. The U.S. data comes amid signs growth in China and Europe continues to lag expectations despite unprecedented monetary stimulus.

Currencies

The dollar slid versus most major peers, continuing a slide that’s taken it down almost 2 percent this year, following a 9 percent gain in 2015 and an 11 percent rally the year before.

“The dollar is weaker on comments by the Federal Open Market Committee that the global economic outlook will continue to be a headwind,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California. “They’ve reduced their expectations for future rate hikes for the next two years.”

New Zealand’s dollar was the top beneficiary, rising the most among 16 major currencies, while the yen was up 0.6 percent to 112.56 per dollar, touching a one-week high. The Bloomberg Dollar Spot Index, a gauge of the currency among 10 major peers, sank 1.1 percent to its lowest level since Oct. 20.

Bonds

Treasuries surged, with two-year yields falling by 11 basis points to 0.86 percent, the biggest drop since September. Ten-year yields slipped six basis points, or 0.06 percentage point, to 1.91 percent.

Yields on Treasuries due in a decade have fallen since the Fed lifted its lending benchmark for the first time in almost a decade in December. The yield touched the lowest since 2012 in February as a global stock rout and plunging oil prices boosted demand for haven assets and led traders to pare bets on the pace of Fed tightening.

The gap between yields on two-year Treasuries and 30-year bonds -- which are more influenced by expectations for inflation and economic growth -- widened by the most since December, expanding 10 basis points to 186 basis points. the gap narrowed on Tuesday to the least since 2008.

Emerging Markets

The MSCI Emerging Markets Index added 0.1 percent Wednesday, reversing a decline of as much as 0.4 percent. A gauge of 20 developing-nation currencies increased 0.7 percent as Russia’s ruble rallied with oil. The Mexican peso, South African rand and Turkish lira all gained at least 1 percent.

Brazil’s real rose for the first time in three days and the Ibovespa stock gauge climbed 1.3 percent. The appointment of former Brazilian president Luiz Inacio Lula da Silva as chief of staff to his successor Dilma Rousseff fueled concern spending will be bolstered to keep Rousseff in power, imperiling fiscal accounts.

Commodities

Oil climbed the most in three weeks after some OPEC members agreed to meet with other producers in April for talks on capping production, while U.S. crude stockpiles increased by less than anticipated.

West Texas Intermediate crude futures settled at $38.46 a barrel in New York, while Brent gained 4.1 percent to $40.33.

Gold snapped a three-day losing streak after the Fed decision, as the prospect of a global slowdown boosted demand for the metal as a store of value. Bullion for immediate delivery jumped 2.5 percent to $1,262.57 an ounce.

Coffee futures rose to a five-month high amid concern dry conditions in Colombia and Brazil will hamper crops there.

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