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Wednesday, March 15, 2017

Fed Raises Rates, Stocks Rally

On the Market
Posted: 3/15/2017 4:15 PM ET

Fed Raises Rates, Stocks Rally

U.S. stocks finished higher after the Federal Reserve hiked the target for its fed funds rate, as widely expected, while an increase in crude oil prices gave energy issues a boost. Treasury yields fell following the Fed's rate decision, while the economic calendar delivered in line reads on retail sales and consumer price inflation, as well as a 12-year high in homebuilder sentiment. Meanwhile, news on the equity front was light. The U.S. dollar declined, and gold jumped higher.

The Dow Jones Industrial Average (DJIA) increased 113 points (0.5%) to 20,950, the S&P 500 Index gained 20 points (0.8%) to 2,385, and the Nasdaq Composite advanced 43 points (0.7%) to 5,900. In moderately-heavy volume, 913 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.14 to $48.86 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price jumped $21.13 to $1,220.25 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 1.0% to 100.71.

Capital One Financial Corp. (COF $90) finished lower after it announced that its February loan data showed U.S. borrowing decreased versus the prior month and its charge-off rate exceeded expectations, more than offsetting upbeat results from its auto loan segment.

Hostess Brands Inc. (TWNK $16) reported 4Q earnings-per-share (EPS) of $0.14, one penny above the FactSet estimate, as revenues increased 21.6% year-over-year (y/y) to $179 million, topping the projected $170 million. The company reaffirmed its 2017 revenue guidance. Shares were higher. 

Fed raises target for rates, economic news roughly in line with forecasts

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to raise the target for its fed funds rate by 25 bps to a range of 0.75%-1.00%, a move that was widely expected. The FOMC also kept its rate outlook intact, indicating that most Committee members projected two additional rate increases for 2017. In its statement, the FOMC said the pace of any future rate increases would be gradual, and that near-term risks to the economy are “roughly balanced.” Regarding inflation, the Fed indicated that it has increased in recent quarters, moving closer to its 2% longer-run objective, while describing job gains as "solid" and that business investment "appears to have firmed somewhat." Minneapolis Fed president Neel Kashkari was the only member to dissent, opting in favor of a hold.

As well, the Fed provided economic projections, showing only a slight downward change to gross domestic product for next year, while keeping its forecast for inflation and the unemployment rate intact. In her press conference following the decision, Fed Chairwoman Janet Yellen said the economy continues to expand at a moderate pace and that job gains should strengthen further, while also noting that core inflation should reach its 2% benchmark in the next few years. As well, Yellen indicated that waiting too long to adjust policy could mean an increase in the rapidity of any increases in the future. Read more insightful analysis of the Fed’s decision in an article from Schwab’s Director of Fixed Income, Collin Martin, later today at www.schwab.com/marketinsight, while you can find our article Fed Rate Hike: What Does it Mean for Your Portfolio?, at www.schwab.com/insights, and you can also follow Schwab on Twitter: @schwabresearch.

Advance retail sales (chart) for February ticked 0.1% higher month-over-month (m/m), matching the Bloomberg forecast, and compared to January's upwardly revised 0.6% rise. Also, last month's sales ex-autos were up by 0.2% m/m, topping expectations of a 0.1% gain, and following the positive revision to a 1.2% gain seen in the previous month. Sales ex-autos and gas were higher by 0.2% m/m, in line with estimates, and versus January's favorable revision to a 1.1% gain. The retail sales control group, a figure used to help calculate GDP, rose 0.1%, compared to the projected 0.2% rise, but the prior month's figure was revised solidly higher to a 0.8% increase from the previously reported 0.4% gain.

The Consumer Price Index (CPI) (chart) was up 0.1% m/m in February, above estimates of a flat reading, while January's 0.6% increase was unrevised. The core rate, which strips out food and energy, gained 0.2% m/m, matching expectations and compared to January's unrevised 0.3% rise. Y/Y, prices were 2.7% higher for the headline rate, in line with forecasts, while the core rate was up 2.2%, also matching projections. January y/y figures showed an unrevised 2.5% rise and an unadjusted 2.3% increase for the headline and core rates respectively.

The Empire Manufacturing Index showed output from the New York region slipped but remained solidly in expansion territory (a reading above zero) for March. The index dipped to 16.4 from February's unrevised 18.7 level, with forecasts calling for a 15.0 reading.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month jumped to 71—the highest level since June 2005—compared to expectations for it to remain at February's unrevised 65 level, with a 50 mark separating good and poor conditions. The NAHB said builders are buoyed by President Trump's actions on regulatory reform, and while they are clearly confident, it expects some moderation moving forward amid a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.

Business inventories (chart) rose 0.3% m/m in January, matching forecasts, and versus December's unrevised 0.4% gain.

The MBA Mortgage Application Index rose 3.1% last week, following the previous week's 3.3% gain. The increase came as a 4.1% gain for the Refinance Index was met with a 2.3% rise for the Purchase Index. The average 30-year mortgage rate jumped 10 basis points (bps) to 4.46%.

Treasuries moved higher following the Fed's decision, as the yield on the 2-year note fell 9 bps to 1.30%, the yield on the 10-year note was down 10 bps to 2.50% and the 30-year bond rate declined 7 bps to 3.11%.

For additional analysis on the stock markets and the potential increased volatility, see our article, End of an Era: Why Volatility May Return to the Stock Market at www.schwab.com/insights. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Big Machine: Why Large Caps Are Likely to Outperform at www.schwab.com/marketinsight, while Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers analysis of the political front in his latest article,  Return of the Debt Ceiling: What It Means for Investors, at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders.

The domestic economic calendar will continue to be busy tomorrow, beginning with housing starts and building permits, forecasted to show starts rose 1.4% m/m during February to an annual rate of 1,264,000, and permits declined 1.9% to a 1,268,000 pace, followed by weekly initial jobless claims, with economists expecting a level of 240,000, down slightly from the prior week's 243,000. Rounding out the day will be the Philly Fed Manufacturing Index, expected to decline to a level of 30.0 for March from the 43.3 posted last month, as well as the Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, with the report anticipated to show that 5.56 million jobs were available to be filled in January, above the 5.50 registered in the month prior.

Europe higher, Asia mixed ahead of Fed decision

European equities traded modestly higher, with oil & gas issues leading the way as crude oil prices recovered from a recent tumble following some bullish oil inventory data. The markets appeared cautious ahead of today's monetary policy decision in the U.S., which is expected to deliver a rate hike. Political uncertainty in the region continued to garner heavy attention, with flared-up U.K. Brexit uneasiness as Prime Minister May was granted the right to trigger Article 50 yesterday, which will begin the formal process of negotiating the nation's exit from the European Union. This came as Scottish First Minister Sturgeon said earlier this week that she will start the legal process of preparing for a second independence referendum.

The markets also focused on today's Dutch election, which is considered a test of whether populism in Europe will threaten to break up the euro. This will set the stage for next month's key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?. In economic news, eurozone 3Q employment rose, while U.K. employment topped forecasts. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mixed ahead of today's highly expected rate hike in the U.S., while European political uncertainty remained elevated. Japanese equities declined, while those in China were mixed, as mainland listings ticked higher and shares in Hong Kong declined, with Premier Li concluding its annual National People's Congress by offering a relatively upbeat economic tone but expressing a mixed outlook for trade relations with the U.S. Stocks in Australia gained ground after the nation reported a slight increase in consumer confidence, while South Korea's markets finished flat and India's traded modestly lower. Schwab's Michelle Gibley, CFA, provides timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Reports set for release on tomorrow's international economic calendar include employment data from Australia, and CPI from the Eurozone, while both the Bank of Japan and the Bank of England will conduct their respective monetary policy meetings, with economists expecting no change to the stance of either nation.

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