Treasuries Rally on Fed While Dollar Slips as Stocks Close Mixed

No Surprise: Fed Leaves Rates Unchanged
  • Officials reiterate gradual pace of tigthening, hold on rates
  • Apple rallies following earnings; Facebook jumps after market

Treasuries rose, the dollar weakened versus the euro, while U.S. stocks were mixed after the Federal Reserve reiterated its intention to tighten monetary policy gradually, even as the economy shows signs of improvement. Gold rallied.

Yields on 30-year Treasury notes fell seven basis points as two-year yields shed four basis points, as gold futures climbed for a second day. The greenback erased gains against a basket of 10 of its major peers after Fed officials reiterated that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” The S&P 500 Index slipped as crude’s ongoing plunge weighed on energy stocks. Apple Inc. rose the most since 2014 and Facebook Inc. jumped in extended U.S. trading.

“There’s not enough here to suggest that the Fed is any closer to raising interest rates,” said Anthony Valeri, fixed-income investment strategist at LPL Financial in San Diego. “It allows the Fed to keep their options open.”

The Fed left interest rates unchanged Wednesday, while saying risks to the U.S. economy have subsided and that the labor market is getting tighter. The central bank is taking stock of the economy’s progress in the wake of the U.K.’s vote to leave the European Union, as well as the large swing from May’s soft labor report to June’s rebound. While Chair Janet Yellen has repeatedly stated that the Fed is likely to raise borrowing costs gradually, market volatility and the unexpected dip in job gains have delayed such plans.

“They like the economy. If things run smoothly through the fall you could see a December rate hike happening,” Mark Kepner, managing director and equity trader at Chatham, New Jersey-based Themis Trading LLC, said by phone. “The Fed is looking at this saying we made it through the first phase where the Brexit vote went a way people didn’t think it would go, we had a selloff, but things have improved remarkably since then and they’ve noticed that.”

Stocks

The S&P 500 Index fell 0.1 percent to 2,166.58 as of 4 p.m. in New York. Losses in the index initially deepened after the Fed’s statement, but they were pared as the dollar turned negative. The Nasdaq 100 Index climbed 0.7 percent, while the Dow Jones Industrial Average finished little changed.

U.S. stocks spent most of the session mixed, with earnings reports setting the tone. Apple rallied 6.5 percent after saying late on Tuesday that iPhone demand picked up, forecasting fourth-quarter sales that may exceed analysts’ estimates. European suppliers Dialog Semiconductor Plc and AMS AG climbed at least 4 percent. 

Twitter Inc. tumbled 15 percent after forecasting third-quarter revenue that trailed analysts’ projections. Coca-Cola Co. dropped 3.3 percent on second-quarter sales that lagged behind estimates. McDonald’s Corp. capped its biggest two-day slide since August.

“When you throw some disappointing earnings reports and some nervousness about interest rates together, you see the market catch a bit of a down draft like today,” said Terry Morris, a senior equity manager who helps oversee about $3.2 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co. “But when you put it in context, it’s still up nicely for the year and nicely for the month.”

Facebook jumped more than 5 percent in after-markets trading as the social-network provider posted better-than-expected revenue and user growth.

Earnings also dominated in Europe, with the Stoxx Europe 600 rising to a one-month high after four days of ending little changed. LVMH Moet Hennessy Louis Vuitton SE jumped after the world’s biggest luxury-goods maker reported stronger demand for its champagnes and cognacs. PSA Group surged, leading a gauge of automakers to the best gain among industry groups.

Futures on Asian indexes mostly fell, with contracts on Osaka-traded Nikkei 225 Stock Average foreshadowing a 0.7 percent drop and Kospi index futures in Seoul down 0.2 percent. Contracts on Australia’s S&P/ASX 200 Index added 0.2 percent, however.

Currencies

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, fell 0.1 percent, erasing gains of as much as 0.5 percent from before the Fed decision. The euro gained 0.7 percent to $1.1058.

Odds of the Fed hiking rates by the end of 2016 dropped to 45 percent after the central bank’s statement, down from 47 percent a week ago, though well ahead of the 7.76 percent probability a month ago.

The yen weakened 0.7 percent to 105.40 per dollar after Japanese Prime Minister Shinzo Abe surprised markets with a fiscal-stimulus package exceeding 28 trillion yen ($265 billion), a bid to jump-start the country’s floundering economy.

Bonds

Benchmark 10-year Treasury note yields fell six basis points, or 0.06 percentage point, to 1.50 percent, according to Bloomberg Bond Trader data. Ten-year yields set a record-low 1.318 percent on July 6.

Gains on shorter maturities were limited as policy makers said that “near-term risks to the economic outlook have diminished.” The statement also said officials expect “that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

Treasuries have rallied in 2016 as the Fed held off on raising rates after liftoff from near zero in December, while central banks in Japan and Europe maintained unprecedented stimulus.

Commodities

Oil extended losses at a three-month low in New York as government data showed that U.S. crude stockpiles unexpectedly climbed last week, halting the longest streak of declines on record. West Texas Intermediate oil for September delivery dropped 2.3 percent to settle at $41.92 a barrel in New York. It’s the lowest close since April 19.

Gold capped for a second straight gain as the Fed reiterated plans to slowly tighten. Futures for December delivery advanced 0.5 percent to settle at $1,334.50 an ounce.

Copper futures for delivery in September lost 1.8 percent to close at $2.185 a pound on the Comex, the biggest loss since June 24. Silver futures for September delivery climbed 1.6 percent to end at $29.995 an ounce.

Commodities will probably rebound next year as demand strengthens, according to the World Bank, adding its voice to those including Citigroup Inc. who’ve forecast that 2017 may be a better year for raw-material prices.

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