A pedestrian walks past men looking at an electronic monitor displaying shares prices outside a securities firm in Tokyo, Japan. (Photographer: Yuriko Nakao/Bloomberg)

Treasuries Climb, Dollar Retreats on Fed Outlook: Markets Wrap

(Bloomberg) -- Treasuries rose and the dollar slipped for the first time in five days after the Federal Reserve increased interest rates and raised its outlook for economic growth in 2018 without lifting its forecast for the number of hikes next year. Stocks were mixed and gold surged.

The S&P 500 Index swooned in the final 15 minutes of trading to end lower. Earlier, stocks spiked to an intraday record on the Fed’s widely anticipated announcement that it was hiking rates by a quarter of a percentage point amid rising optimism in the economy. The yield on 10-year Treasuries slumped with the dollar after central bankers kept their projection for three hikes next year unchanged as inflation remains persistently sluggish. The small-cap Russell 2000 Index, whose members’ fortunes are most closely tied to economic gains, was the strongest performing equity gauge.

“Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington. Inflation will remain below the Fed’s 2 percent goal in the near term but will “stabilize” around the target in the medium term, the central bank said.

Market strategists said the Fed’s statement was good news for stocks.

“This is a tailwind for equities as it implies that growth has improved while inflation remains weak making the FOMC unlikely to tighten too quickly,” Dennis DeBusschere, head of portfolio strategy at Evercore ISI, wrote in a note to clients. “Inflation will move higher next year, which will firm up market expectations for rate hikes toward the Fed’s view and cyclical/financial stocks will outperform.”

The dollar halted four days of gains, its longest winning streak since January 2016. Earlier, data showed U.S. consumer inflation picked up in November, though the so-called core gauge -- which excludes food and energy costs -- unexpectedly slowed. On Tuesday, the U.S. Labor Department reported that the producer price index rose more than forecast in November.

“If you believe in growth, then you’re sort of expecting higher inflation, but it’s hard to predict where and when and how much,” said Michael Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds in San Francisco. “But gradually rising interest rates are a bi-product of a healthy, growing economy. You need to adjust monetary supply in reflection of that growth.”

The European Central Bank is expected to reveal details of plans to taper asset purchases on Thursday. Comments on the outlook for 2018 will be the focus for investors as they weigh the impact of coming policy normalization on global asset prices.

Meanwhile, crude reversed direction and slid below $57 a barrel after the U.S. Energy Information Administration reported that production is rising to keep up with falling inventories.

Terminal customers can read more in our Markets Live blog.

Here are some of the key events scheduled for this week:

  • The ECB, Bank of England and Swiss National Bank set monetary policy at their respective meetings on Thursday.
  • U.S. retail sales data is due on Thursday.
  • European lawmakers continue to debate Brexit and weigh moves on the next step, while North America Free Trade Agreement negotiators meet again.

And these are the main moves in markets:

Stocks

  • The S&P 500 fell less than 0.1 percent to 2,662.85, ending a four-day rally. It earlier hit a record 2,671.88.
  • The Dow Jones Industrial Average, Nasdaq 100 Stock Index and Nasdaq Composite Index advanced. The Russell 2000 added 0.6 percent.
  • The Stoxx Europe 600 Index fell 0.2 percent. 
  • The U.K.’s FTSE 100 Index slipped less than 0.1 percent. 
  • Germany’s DAX Index declined 0.4 percent. 
  • The MSCI Asia Pacific Index climbed 0.5 percent.

Currencies

  • The Bloomberg Dollar Spot Index declined 0.7 percent, the first retreat in more than a week. 
  • The euro climbed 0.7 percent to $1.1826, the biggest increase in three weeks. 
  • The British pound gained 0.7 percent to $1.3416.

Bonds

  • The yield on 10-year Treasuries fell five basis points to 2.3475 percent, the first retreat in a week. 
  • Germany’s 10-year yield was unchanged at 0.314 percent.
  • Britain’s 10-year yield dropped less than one basis point to 1.216 percent.

Commodities

  • West Texas Intermediate crude fell 0.7 percent to $56.74 a barrel. 
  • Gold rose 0.9 percent to $1,255.52 an ounce. 
  • Copper increased 1 percent to $3.03 a pound, hitting the highest in more than a week with its sixth consecutive advance.

©2017 Bloomberg L.P.

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