Before The Bell: FOMC Reaffirms Dovish Stance

stock market morning report

A confluence of factors made for choppy trading ahead of the FOMC decision and after. But the markets closed little changed amid a lack of surprise from the Fed as it reaffirmed it’s lower  (Dovis) for a long time stance.

This morning the markets are up.  Improving outlooks on a stimulus deal added to the optimism on vaccines to give Wall Street a lift early on. Gains were generally sustained with the S&P 500 edging up 0.18% at 3701, while the NASDAQ was 0.5% higher at 12,658, and the Dow dipped -0.15% to 30,154.

Market Drivers

  • U.S. data calendar has weekly jobless claims, housing starts, Philly Fed index
  • Canada calendar is empty today – retail sales are due tomorrow
  • BoE expected to keep policy settings on hold, waiting on Brexit outcome
  • DXY dollar index posted a new 32-mth low amid backdrop of riskon positioning
  • Gilt yields have moved higher, Bunds outperformed, stocks also traded mixed
  • Eurozone November HICP inflation confirmed at -0.3% y/y, core at 0.2% y/y
  • SNB has continued to focus on currency intervention despite U.S. criticism
  • Norges Bank kept key rates unchanged, as had been anticipated
  • The House of Representatives passed a $1.5 trillion infrastructure bill with a strong possibility of more bills and increased spending.
  • Domestic coronavirus infections increased by over 51,000 yesterday, marking a new daily record, as cases in California, Texas, and Arizona continued to rise. California Governor Gavin Newsom ordered bars and restaurants to close across most of the state.

A much weaker than expected retail sales report was a catalyst for profit-taking on stocks early on, especially with the major indexes already at or near record highs on vaccine and stimulus hopes. Treasuries were underwater on the rally in equities and as there was some disappointment that the Fed didn’t extend QE duration. But losses were trimmed as the FOMC was seen remaining very accommodative for a long time, and not ruling out further support down the road.

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The FOMC left ZIRP intact as universally expected with no big surprises in the statement. There was only a marginal update on guidance, and it was qualitative. The Fed noted it will increase its holding by at least $120 bln per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” The Fed did not extend the maturity of its QE purchases, which will disappoint some in the market. It was a 50-50 call. The Fed reiterated “the path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” The dot plot shows near zero rates are expected to be maintained through 2023.

For today’s calendar: weekly jobless claims are expected to see initial claims dip to 840k from 853k, while continuing claims should increase slightly to 5.780 mln from 5.757 mln. November housing starts are seen steady at a 1.530 mln annual pace. The December Philly Fed index is forecast to drop to 18.0 from 26.3. The Treasury announces 20-year bonds, 5-year reopened TIPS, and reopened 2-year notes FRN. The earnings calendar features reports from Accenture, FedEx, and General Mills.

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