Fed Continues to Taper
The U.S. equity markets closed the trading session higher, as stocks advanced in the wake of the Federal Reserve’s afternoon statement that it will, as expected, continue tapering the pace of its monthly asset purchases. In other economic developments, the first read on 1Q GDP was much softer than expected, 1Q employment costs rose at a smaller rate than anticipated and weekly mortgage applications declined, while ADP job growth and regional manufacturing activity came in stronger than forecasted.
In equity news, Twitter topped analysts’ quarterly expectations, but its monthly user growth figures disappointed. Time Warner announced results that bested analysts’ estimates, while eBay exceeded the Street’s forecasts, but offered softer-than-expected guidance. Energizer Holdings announced plans to separate its household products and personal care divisions into two independent, publicly-traded companies.
The Dow Jones Industrial Average rose 45 points (0.3%) to 16,581
The S&P 500 Index gained 6 points (0.3%) to 1,884
The Nasdaq Composite added 11 points (0.3%) to 4,115
In moderate volume, 908 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq
WTI crude oil dropped $1.54 to $99.74 per barrel, wholesale gasoline fell $0.05 to $2.96 per gallon
The Bloomberg gold spot price declined $4.91 to $1,291.01 per ounce
Fed continues to taper, while 1Q GDP widely misses forecasts
The statement from the two-day Federal Open Market Committee meeting was released at 2:00 p.m, where the Fed announced that information received since the Committee met in March indicates that growth in economic activity picked up in recently, after having slowed in part because of adverse weather conditions. As expected, the Central Bank stated that it will continue to reduce the pace of its current stimulus program by $10 billion to $45 billion a month. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month.
The Committee reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate, and in determining how long to maintain the current exceptionally low target range for the federal funds rate, the Committee will assess progress toward its objectives of maximum employment and 2% inflation by taking into account a wide range of information. All of the voting members of the Committee supported the decision to continue tapering.
The first look — of three– at 1Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 0.1%, well below the 2.6% expansion in 4Q and the 1.2% growth forecasted by economists surveyed by Bloomberg. However, personal consumption came in well above forecasts, rising 3.0%, following the 3.3% increase recorded in 4Q, and versus the 2.0% gain that was projected. The Commerce Department said the strong gain in personal consumption was offset by negative contributions from exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending.
On inflation, the GDP Price Index came in cooler than expected at a 1.3% rise, from the 1.6% advance seen in 4Q, which was the increase that economists anticipated, while the core PCE Index, which excludes food and energy, rose 1.3%, above expectations of a 1.2% gain, and following the 1.3% growth in 4Q.
The ADP Employment Change Report showed private sector payrolls rose by 220,000 jobs in April, versus the forecast of economists, which called for a 210,000 increase, while March’s rise of 191,000 jobs was revised higher by 18,000 to a gain of 209,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader nonfarm payroll report, expected to increase by 215,000 jobs in April, after posting a rise of 192,000 in March.
The Chicago Purchasing Managers Index showed growth in Midwest activity accelerated more than expected, after rising to 63.0 in April—the highest since October 2013—from the unrevised 55.9 level in March, compared to the increase to 57.0 that economists had expected, with a reading above 50 depicting growth.
The MBA Mortgage Application Index fell 5.9% last week, after the index declined 3.3% in the previous week. The decline came as a 6.9% drop for the Refinance Index was accompanied by a 4.4% decrease for the Purchase Index. Moreover, the average 30-year mortgage rate remained at 4.49%.
Treasuries were higher, with the yield on the 2-year note falling 3 basis points (bps) to 0.41%, the yield on the 10-year note declining 4 bps to 2.65%, and the yield on the 30-year bond dropping 2 bps to 3.46%.
Europe and Asia finish mixed
The European equity markets finished mixed, as traders reacted to the plethora of U.S. economic data, which followed some lackluster data in the region, while treading cautiously ahead of the Federal Reserve’s monetary policy decision. Eurozone consumer price inflation data accelerated to a 0.7% y/y rise for April, from a 0.5% increase in March, but below the 0.8% gain that was expected and the European Central Bank’s target of close to 2.0%. German retail sales fell in March and French consumer spending dropped much more than expected for last month. However, Spain’s 1Q GDP grew 0.4% q/q, matching forecasts, while the German unemployment change fell more than expected this month.
Stocks in Asia finished mixed ahead of today’s flood of economic data out of the U.S., with Japanese stocks returning to action following yesterday’s holiday. In central bank action, the Bank of Japan announced its decision to keep its monetary policy unchanged, while gains were held in check as economic reports showed the nation’s industrial production rose by a smaller amount than expected in March and the country’s manufacturing output depicted contraction for the first time since February 2013. Elsewhere, South Korea reported that its industrial production growth for March missed expectations.