US benchmark indices hit fresh highs on Wednesday as the FOMC meeting concluded to scale back the bond-buying programme only by $15 billion per month, which is much less than expected.
Fed officials also see no rush for a rate hike. As it was broadly expected that the Fed would change its tone on “transitory” regarding high inflation, the decision relieved investors from the fear of an aggressive monetary tightening policy and lifted risk-on sentiment across the broad markets.
What was in the Fed statement?
Bond-purchase tapering: the Fed decided to start scaling back the bond-buying programme by $15 billion per month in November and December, $10 billion less in treasury, and $5 billion less in mortgage-backed securities.
No rush to raise interest: the Fed keeps the language of "transitory" in the statement and sees no rush for a rate hike. The Fed chair Jerome Powell says central banks are not behind the curve and see the wage growth is not due to tightened labor markets in the afterward press conference.
The Dow Jones Industrial Average rose 0.29%, to 36,157.58. The S&P 500 was up 0.65%, to 4,660.57, while Nasdaq added 1.04%, to 15,811.58. The three major indices finished at record highs for the fourth straight trading day. The small-cap index Russell 2000 surged by 1.8%, to 2,404.28, at a new high too. 8 out of 11 sectors in the S&P 500 closed higher. Consumer discretionary stocks led gains. Energy unperformed due to a decline in crude oil prices.
The Fed’s dovish guidance is being interpreted as a bullish push to the US stock markets by investors. Nasdaq, the technology heavily weighted index, might outperform for the rest of the year. In the backdrop of continuous overheated inflation and ongoing disruption to the global supply chain, the growth stocks will be in favor of investors to offset flying inflation. Also, the airline and tourism industry might be going into a boom due to border reopening and the busy holiday season ahead. However, the banking sector could be facing headwinds by the Fed’s downplay on rate hikes. Energy will be still in the hot spot for investors due to a shortage of supply and increasing demand.
The greenback weakened on the Fed’s decision. The US dollar index fell 0.27%, to 93.85. EUR/USD was up 0.3%, sterling increased 0.5% against the US dollar, and Kiwi dollar appreciated 0.47% against the USD. The other currencies all slightly strengthened too. However, the USD index keeps its steady range between 93.30-94.30 recently. The FX markets reacted less volatile towards the Fed’s conclusion.
NZD became one of the strongest currencies among all its peers as the Reserve Bank of New Zealand (RBNZ) had its first rate hike in 7 years in September. It is expected the RBNZ will accelerate the rake-hike pace due to fast recovery labor markets and high inflation.
Most of the central banks are now very cautious about the tightening path in the monetary policy. On one hand, the economic recovery from the pandemic is highly uncertain with Delta spreading rapidly, even though the vaccination rate keeps pace. On the other hand, inflation is at a decades-high due to the massive QE programme and ultra-low interest. Economists are concerned there will be more damage if the Fed had to aggressively increase interests when inflation is not “transitory”.
Gold futures slumped $15, to $1774.2 per ounce, pressed by the risk-on sentiment. The fell on base metal is also caused by a spike in the US government yield. The 10-year bond finished at 1. 58% after it surged to 1.61%.
Crude oil futures also fell sharply due to a greater-than-expected build in the weekly stockpiles. The WTI futures tumbled 4.83%, to $79.87. The OPEC+ will meet tomorrow to discuss oil production. It is highly expected the organization will keep its gradual output increase by 400,000 barrels per month, which is being seen not as enough for the increasing demands.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.