Fed raised interest rates by a quarter point, causing the Nasdaq to fall and that Dow to hit a new all-time high.
Stocks finished mixed today after the Federal Reserve raised interest rates by a quarter of a point today.
The S&P 500 dipped 0.1% to 2,437.92 today, while the Dow Jones Industrial Average rose 46.09 points, or 0.2%, to 21,374.56, a new record high. The Nasdaq Composite dropped 0.4% to 6,194.89. The 10-year Treasury yield fell 0.068 percentage point to 2.138%, even as the Fed hiked interest rates.
Albion Financial Group’s Jason Ware contends the Fed’s balance sheet will take precedence over rate hikes:
As I have discussed in market meetings here at Albion over the past couple of months we believe that it is here (the balance sheet) that the Fed may – for at least the time being – pivot their focus in terms of “normalizing” monetary policy as well as providing an impetus for longer-term rates to rise. If we are right this could slow or delay the pace of future rate hikes. Indeed, we think that based on current information the next rate hike is unlikely to be before December 2017 – unless growth and inflation materially pick up before then. The monetary theory here would be to take some pressure off of the short end of the curve, while allowing (hopefully) the longer end to rise. The 2s-10s spread is currently at +0.80% and directionally has been flattening as of late. The Fed would probably like to see this begin to expand some. The caveat to this theory is that due to the glut of global liquidity in search of yield US Treasurys remain attractive on a relative basis. This could potentially neutralize or dilute the impact of the Fed’s balance sheet drawdown program, at least early on. That said, at the very least the effect of this inertia is that it probably puts a floor in on longer-run Treasury yields (save for an unexpected dramatic slowdown in the US economy or an acute flight to safety trade due to some global event). Our base case is that gradually losing the full force of the Fed (the largest single holder of Treasurys) is likely to have upward drift influence on longer terms yields into 2018.
BMO’s Ian Lyngen notes that the market has started responding to good news as bad news:
…we did a study in the past week, suggesting that the prior relationship between risk assets and yield pricing was shifting and that the way that assets have reacted to recent Fed hikes has started to change back to a reaction function that more closely resembles the “good news is bad news” dynamic that we saw ahead of the Trump election last year. That loss of resilience also suggests to us that the Fed’s assumption that they can set the taper on auto-pilot and hike simultaneously may eventually end up being a bridge too far.
But a bridge to what?