IT'S ALL ABOUT THE FED

Stocks opened sharply higher today (Dow +161 pts; SPX +.67%). Interest-rate sensitive sectors are moving in response to yesterday’s Fed meeting (see below). Homebuilders, REITs, and utilities are up nicely, while banks are down on the day. Commodities are mixed (gold down, copper and iron ore up). WTI crude oil is flat, hovering around $60/barrel. Bonds are sharply higher as well. The 10-year Treasury yield slipped to 2.52% after the Fed announcement. That’s a 14-month low. The yield curve flattened again; the difference between the 2-year and 10-year Treasury yields is down to 11 basis points (.11%).

The Federal Reserve wrapped up its monthly policy meeting yesterday, and issued a statement that confirmed a very dovish approach to monetary policy. The statement noted continued strength in the labor market, but said economic growth has “slowed from its solid rate” and inflation pressures are “muted.” That suggests there is no reason to raise interest rates until perhaps 2020. Further, the Fed plans to reduce the pace of its balance sheet runoff. The amount of Treasuries allowed to mature without reinvestment will drop to $15bil per month in May (although mortgage bond runoff will stay at $20bil per month). The Fed plans to completely halt runoff in September. All of that means interest rates will be lower for longer. Bankrate.com’s average 30-year fixed mortgage rate plunged to 4.17% today from 4.3% before the Fed’s announcement.

Wall Street reactions to the Fed are varied. Economist Ed Yardeni said that “for the stock market, it was a joyous occasion for sure.” Trader Joe Terranova said “The [Fed Chair Jerome] Powell hedge fund is in full force going out and buying up asset prices.” In other words, lower interest rate expectations give a valuation boost to both stocks and bonds. Economist Joe LaVorgna said “rates to me have to go lower, and the curve needs to be steeper” in order to get credit creation and a stronger economy. In other words, lower rates (and a flat yield curve) aren’t good for banks.

CNBC’s Mike Santolli says there is a lot of disagreement among investors about where we are in the business cycle. Most expect some type of “soft landing” as the economy slows but avoids recession. But he acknowledged a “foggy landscape” in terms of understanding how far away off the next recession is.


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