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Wednesday, September 21, 2016

Markets Gain on Steady Fed

On the Market
Posted: 9/21/2016 4:15 PM ET

Markets Gain on Steady Fed

U.S. equities moved higher after the Federal Open Market Committee decided to leave rates unchanged following its two-day monetary policy meeting, while financials got a morning boost from a change in monetary stance from the Bank of Japan. Crude oil finished solidly higher following a bullish government oil inventory report, while technology issues advanced on an upbeat earnings report from Adobe Systems and after Dow member Microsoft upped its dividend and share repurchase program. Treasuries and gold moved higher following the Fed decision, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 164 points (0.9%) to 18,294, the S&P 500 Index gained 23 points (1.1%) to 2,163, and the Nasdaq Composite increased 54 points (1.0%) to 5,295. In moderate volume, 881 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.29 to $45.34 per barrel, wholesale gasoline gained $0.04 to $1.40 per gallon and the Bloomberg gold spot jumped $18.96 to $1,333.80 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.54.

FedEx Corp. (FDX $174) reported fiscal 1Q earnings-per-share (EPS) ex-items of $2.90, above the $2.78 FactSet estimate, as revenues grew 19.5% year-over-year (y/y) to $14.7 billion, topping the expected $14.6 billion. FDX's full-year profit outlook had a midpoint that exceeded the Street's expectations. FDX finished solidly higher.

Adobe Systems Inc. (ADBE $108) posted 3Q EPS ex-items of $0.75, three cents north of estimates, with revenues rising 20.2% y/y to $1.5 billion, roughly in line with forecasts. ADBE increased its earnings targets for the year. Shares of ADBE were markedly higher. 

CarMax Inc. (KMX $55) reported 2Q earnings ex-items of $0.88 per share, in line with forecasts, as revenues increased 2.9% y/y to $4.0 billion, below the expected $4.1 billion. 2Q same-store sales of used cars rose 3.1% y/y, below the projected 3.5% gain, as store traffic decreased. KMX came under pressure. 

KB Home (KBH $15) announced 3Q profits of $0.42 per share, exceeding the forecasted $0.39, as revenues increased 8.3% y/y to $913 million, below the anticipated $943 million. KBH gained ground.

Dow member Microsoft Corp. (MSFT $58) reported an 8.0% increase of its quarterly dividend to $0.39 per share, while also announcing the approval of a new share repurchase program of up to $40 billion. MSFT was higher.

Fed stays put, but leaves door open for hike this year

At 2:00 p.m. ET, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, where it kept its policy stance unchanged at a targeted range of 0.25%-0.50% for the Fed funds rate. The Committee noted that "the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives. As well, the Committee, judged that "near-term risks to the economic outlook appear roughly balanced," the job market was solid, and that it expects the labor market to "strengthen further." The move was widely expected, as odds of a rate hike at this meeting diminished in the wake of some choppy economic data as of late, though the odds of a December rate increase continue to hover around the 50% mark, per Bloomberg. The Committee also released updated economic projections, slightly decreasing their current year forecasts for inflation and output for this year, while slightly increasing its projection for unemployment for the year. Statistics for years 2017-2019 remained steady.

In her scheduled press conference after the statement, Chairwoman Janet Yellen indicated that she was pleased with how the economy was progressing, noting that household spending is driving the improvement. Yellen also said that while most in the Committee expect a rate increase this year, it was prudent to take a cautious approach to any future rate increases.

Look for analysis on the Fed's decision from Schwab's Chief Fixed Income Strategist Kathy Jones later today at www.schwab.com/marketinsight, while you can also follow Kathy on Twitter: @kathyjones.

The MBA Mortgage Application Index declined 7.3% last week, after gaining 4.2% in the previous week. The decrease came as a 7.6% drop for the Refinance Index was met with a 6.8% fall for the Purchase Index. The average 30-year mortgage rate rose 3 basis points (bps) to 3.70%.

Treasuries finished higher, as the yield on the 2-year note was flat at 0.78%, while the yield on the 10-year note fell 3 bps to 1.65% and the 30-year bond rate lost 5 bps to 2.39%.

Tomorrow, we will get a look at the largest portion of the housing sales market in the form of August existing home sales, with closings on homes expected to increase 1.1% month-over-month (m/m) to an annual rate of 5.45 million units. As noted in the Schwab Market Perspective: Round and Round We Go…, economic data appeared to be perking up in June and July, aided by better housing data. And while the economy still appears to be growing, the recent round of data has thrown some cold water on the hopes for a sustainable uptick in growth. Read more at www.schwab.com/marketinsight, while you can also find more on the housing sector in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform. Follow Schwab on Twitter: @schwabresearch.

As well, weekly initial jobless claims will be released, forecasted to tick higher to 261,000 from the prior week's 260,000, as well as the Index of Leading Economic Indicators, with economists expecting a flat reading for August following the 0.4% month-over-month increase seen in July. Rounding out the calendar will be regional manufacturing activity reports from the Chicago Fed and the Kansas City Fed.

Europe and Asia higher following Bank of Japan policy decision

European equities moved mostly higher, ahead of today's highly-anticipated monetary policy decision from the Fed. However, with the Fed expected to leave its policy stance unchanged, the Bank of Japan (BoJ) garnered focus after it changed its previous policy stance, which boosted the global financial sector. The BoJ opted to not go further into negative interest rate territory, which has weighed on the outlook for banking sector profitability, deciding to go in a different direction by targeting the yield curve and committing to overshooting its inflation target. The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mostly to the upside. The economic calendar remained light, though U.K. public sector net borrowing in August rebounded. Amid the heightened scrutiny on the global monetary policy landscape and continued uncertainty regarding global growth, Schwab's Jeffrey Kleintop, CFA, offers his latest analysis for global investors in his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational.

Stocks in Asia finished mostly to the upside in the wake of the Bank of Japan's much-awaited monetary policy decision, where it changed its framework and appeared to foster optimism that the central bank was willing to try a different approach to boosting economic activity. The BoJ held off on further reducing rates into negative territory but announced that it will shift from a monetary base focus to targeting the yield curve with its government bond purchases as it also scrapped the average maturity target for its government bond holdings. Moreover, the BoJ abandoned its 2.0% inflation target and committed to overshooting its inflation goal. Japanese stocks rallied on the move, led by financials, while the yen weakened during the session, but reversed higher after the closing bell. Amid the increased volatility as of late, Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles at www.schwab.com/oninternational.

Mainland Chinese equities and those listed in Hong Kong rose, as did markets in Australia and South Korea, but cautiousness ahead of the Fed decision hamstrung Indian securities.

Reports slated for tomorrow's international economic calendar include: import prices from Germany, the business climate index from France and Spain's trade balance.

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