US stocks surged on Wednesday in the wake of the highly-expected Federal Reserve rate hike.
The policy rate rose by 25 basis points to stand at 1% for the first time in a decade. It is also the third rate hike since the 2008 recession and the first since December. Officially, it is in a band of 0.75%-1.0% and the Fed maintained its current policy of reinvesting maturing assets in its portfolio.
The bourse was already higher before the rate decision thanks to a rebound by oil prices following days of depressed prices on worries about a global oil glut persisting.
The S&P 500 ended the session up 0.8% at 2385 - around a two-week high. Its top gainer was Southwestern Energy Company (NYSE:SWN) up 5.8% at $7.81 after the West Texas Intermediate US oil benchmark rose by 2.3% to $48.83.
Defensive stocks like utilities and other rate-sensitive sectors like real estate, jumped higher on the Fed’s decision, while banks, which stand to profit from higher credit, eased.
The rationale for this movement was that the rate hike had been 98% priced in by markets since two weeks and also because the Fed hinted that it will keep hikes in 2017 to three and not escalate it to four, as some commentators had feared.
That made it a win for Main Street and a loss for Wall Street.
In any event, rates have only risen by 75 basis points in the current business cycle since the depths of the 2008 financial crisis.
“Analysis of the eight peaks in the S&P 500 since 1971 suggest that the US interest rate needs to increase by 1.84% - or between seven and eight one-quarter point rate rises – before the market reaches its peak in the cycle,” said Russ Mould, investment director at AJ Bell.
Federal funds futures pinned the probability of four or more increases at 18.9% during the session - and two hours before the Fed's decision was made public - down from 24.5% on Tuesday.
The S&P Midcap 400 ended up 1.3% at 1729 and led by oil group Qep Resources (NYSE:QEP) up 6.1% to $13.51.
The S&P Smallcap 600 finished with one of its best daily percentage gains for more than a year, up 1.5% at 841 and led by business-to-business distribution solutions leader Veritiv Corporation (NYSE:VRTV) up 11.3% to $62.25 after strong full year earnings.
-- FED REACTION --
US stock reaction to a rate hike from the Federal Reserve on Wednesday as, at the outset, bizarre.
The S&P 500 market bellwether which was up 0.4% extended its gains to up 0.7% at 2383, the session peak, after the announcement of a 25 basis points hike, while the Dow Jones Industrial Average which had been up 0.2% extended gains to 0.4% at a session high of 20,941.
The tech-heavy Nasdaq Composite which had been up 0.25% rose to up 0.6% on the day at 5,897.
But it wasn’t banks – the direct beneficiaries of a rate hike and more to come – that rallied. In fact, financials pared gains.
Meanwhile, defensive utilities, which normally shy from higher interest rates, were the winners. The S&P 500 utilities sector, which tends to benefit from lower rates, rose as much as 1.5% on the heels of the statement. The real estate sector, another low-rate beneficiary, was up by 1.5%.
The reason was that many economists feared that the Fed would not only bring forward the dates of future rate hikes, but that it might also increase the number of hikes in 2017 from three to four.
Instead, sectors hard done by rate hikes enjoyed a relief rally as the Fed stuck to three times this year, meaning two more are in the works for the remainder of 2017.
But there was more good news for Main Street and bad news for Wall Street. The Fed explained that ‘fixed investment’ by US firms appears to have firmed. That indicates that companies are confident about growth prospects.
The Fed also expects inflation to stabilise around its 2% target in the medium term - a sign that it doesn’t intend to hike rates aggressively into 2018 and beyond.
The Fed said that the near-term risks to the US economy are ‘roughly balanced’.
All of that pointed to gains for stocks who want rates to meet their ceiling soon.
The top gainer among S&P 500 stocks, throughout the session, was Southwestern Energy Company (NYSE:SWN) up 5% to $7.75 as oil prices recovered from a drubbing earlier in the week. The WTI was up 1.9% at $48.63.
The S&P Midcap 400 was up 1% at 1724 – also extending its daily gains – and led by Superior Energy Services (NYSE:SPN) up 5.3% to $14.22 while the S&P Smallcap 600 extended gains to up 1.2% at 839 and led by Carbo Ceramics (NYSE:CRR) up 8.3% to $11.58.
Early trading
US stocks edged up on Wednesday as a buoyant oil sector boosted the bourse while investors awaited the Federal Reserve’s decision on interest rates.
Although seen as a done deal since weeks, a 25 basis points hike, was left to wobble precariously on Wednesday after some key US data suggested an economic slowdown which might warrant a stalling of any credit tightening.
Having seen a storming few months, Americans appeared to tighten their purse strings as retail sales in February had the lowest rate of growth in six months.
While strong jobs growth, improving wages and record highs in the US stock market are continuing to support US consumer spending, headline retail sales growth cooled for the third successive month.
Headline retail sales in the world’s largest developed economy rose 0.1% in February from the previous month, and in line with expectations. But it was a huge drop from revised retail sales in January, up to 0.6% from a previous estimate of a 0.4% on the month.
The Fed will determine interest rates at 1400 EDT (1800 GMT).
The S&P 500 was up 0.4% at 2374 and led by Southwestern Energy Company (NYSE:SWN) up 4.2% to $7.69.
The S&P Midcap 400 was up 0.7% at 1719 and, just like the S&P 500, it too was led by energy sector stocks, in this case by Noble Corp (NYSE:NE) up 5.2% to $6.05.
The S&P Smallcap 600 was up 0.9% at 837 and led by Amphastar Pharma (NASDAQ:AMPH) up 7.9% to $13.16 as it rebounded from losses in the past two sessions following fourth quarter earnings disappointment.
Pre-Open
US stocks are set to open firmer on Wednesday as oil prices rebound and investors await the Federal Reserve’s monetary policy decision.
The S&P 500 futures were up 0.2%, Dow futures were up 0.2%and Nasdaq futures were up by the same margin.
The modest rise comes as oil prices appeared poised to snap their deepest losses since November. The West Texas Intermediate US crude marker was up 2% to $48.66 a barrel, while Brent, the global benchmark, rose 1.7% to $51.77 a barrel. But much may hang on EIA US oil glut figures due later in the session.
Backing data from OPEC earlier in the week, a new report from the International Energy Agency showed that global oil supplies rose by 260,000 barrels in February, as both OPEC and non-OPEC producers pumped more crude.
A rate hike is firmly in the bag, if Fed funds rates and market sentiment are any guide.
The Fed is widely expected to lift interest rates for the third time since the financial crisis when its delivers its statement at 1400 EDT (1800 GMT).
While, the central bank offers updates to its economic projections including GDP, the personal consumption expenditures index – its preferred measure of inflation, investors will be watching the so-called dot plot and chair Janet Yellen’s press conference for clues on the pace of rate tightening going forward. Any updates on the possibility of reducing the Fed’s $4.5tn balance sheet are also likely to be on investors’ radar.
But some data may go against the grain. While the New York Empire State manufacturing gauge for March was 16.4 versus a forecast 15, and US consumer prices rose by 2.7% in the year to March – in line with expectations but up from 2.5% inflation in February, retail sales sagged.
US February retail sales fell to 5.7% growth from 6.0% in January.