Dollar Jumps as Fed Pulls the Trigger While Stocks, Debt Decline

  • New dot plot foreshadows more hikes than previously predicted
  • Two-year yields soar; yen, gold sink to lowest since February

Trichet: Fed Prepared Market Well for Rate Increase

The dollar rallied, while Treasury yields spiked as the Federal Reserve signaled a steeper path for in interest rates going forward after their first hike to borrowing costs in 2016. U.S. equities slumped the most since October.

The greenback climbed to its strongest level in 10 months versus the yen, advancing against most of its major peers as as traders speculated that U.S. rates may be elevated faster than previously thought. Utilities and energy shares drove the S&P 500 Index down 0.8 percent as two-year Treasury yields soared to their highest level in seven years. The dollar’s gains sent oil tumbling as gold also retreated. Emerging-market currencies were among the biggest decliners, while Asian index futures diverged amid the yen’s drop.

“The bottom line is that this is more hawkish than the markets expected,” said Dennis Debusschere, a senior managing director and global portfolio strategist at Evercore ISI in New York. “I don’t think the shift higher in the dots was priced in. The consensus going in was that they’d wait until they had details of the fiscal program before they actually raised the rate forecast, and they did that before they saw the details.”

What was only the second U.S. rate increase in a decade tied off a volatile year for markets, with investors whipsawed by ructions in Chinese trading, then the shock wins for Brexit and Donald Trump. The Fed moving further into tightening territory puts it at the vanguard of a shift globally from easing monetary policy toward an increased focus on fiscal stimulus. After hiking by 25 basis points, the central bank said it expects three rate increases in 2017, up from two in its September forecasts. Speaking to reporters after the decision, Fed Chair Janet Yellen sought to downplay the significance of that change in the projections.

“This is a very modest adjustment in the path of the federal funds rate,” Yellen said during the press conference. The decision to raise rates is “a vote of confidence in the economy,” she said, noting that some fed officials, but not all, incorporated the assumption of a change in fiscal policies when making their forecasts.

Expectations U.S. President-elect Trump will boost spending to foster growth sparked an equity surge following his victory. The Fed lifted its target for overnight borrowing costs by 25 basis points, or 0.25 percentage point, on Wednesday to a range of 0.5 percent to 0.75 percent.

Stocks

  • The S&P 500 dropped to 2,253.28 as of 4 p.m. New York time, with sub-gauges of energy producers and utilities down more than 2 percent.  
  • Dow Jones Industrial Average retreating 0.6 percent after touching an intraday record of 19,966.43 following the Fed’s announcement.
  • The MSCI Emerging Markets Index slipped 0.5 percent, with Brazil’s Ibovespa dropping to its lowest level since Sept. 26.
  • Small-cap stocks were hit hard in the U.S., with the Russell 2000 Index down 1.3 percent.
  • Asian index futures were mixed after the Fed’s statement, with contracts on equity gauges in Australia and South Korea signaling losses, while those on shares in Japan and Hong Kong advanced.

Bonds

  • Yields on Treasury notes due in two years climbed as much as 11 basis points, or 0.11 percentage point, to 1.27 percent, their highest level since August 2009.
  • Ten-year Treasuries yielded 2.57 percent, up 10 basis points to their highest point since 2014.

Currencies

  • The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, jumped 1.1 percent, its highest close on record.
  • The yen lost 1.6 percent to 117.04 per dollar as the euro fell 0.9 percent.
  • The South African rand led losses among major currencies, sinking more than 2 percent as the Norwegian krone, Australian and New Zealand dollars and the Brazilian real all weakened by more than 1 percent.
  • The MSCI Emerging Markets Currency Index snapped a two-day climb, slipping 0.1 percent.

Commodities

  • West Texas Intermediate crude slumped 3.7 percent, halting a four-day rally to settle at $51.04 a barrel amid the dollar’s gains. 
  • Gold for immediate delivery fell 1.4 percent to $1,142.95 an ounce, its lowest level since February.
  • The Bloomberg Commodity Index dropped 0.3 percent as futures on sugar, cotton and soybeans fell by at least 0.4 percent.
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