U.S. stocks powered higher Wednesday, while Treasury bond yields extended their session retreat, as investors reacted to what could be seen as a 'dovish' decision by the Federal Reserve to hold rates steady for a second consecutive policy meeting.
The Fed noted a modestly weakening job market, while highlighting both the strength of the broader economy and elevated levels of inflation, but hinted at a bias towards waiting to see the effects of previous hikes before determining their next move.
"The Fed may not have hiked today, but that doesn’t change the fact that high interest rates are likely here to stay for a while," said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.
"That said, we saw some possible signs of economic slowdown in this morning’s weaker-than-expected manufacturing data and the ADP employment reading," he added. "Now we’ll see if Friday’s jobs report points in the same direction. No one wants to see the economy slow down too much, but until it establishes a clear cooling trend, the name of the game will still be “hawkish Fed and higher-for-longer rates.”
U.S. stocks extended earlier gains immediately following the Fed decision and Chairman Jerome Powell's question-and-answer session with the media, with the S&P 500 marked 47 points higher, or 1.1%, on the session while the Dow Jones Industrial Average was up 276 points. The tech-focused Nasdaq was marked 196 points higher.
Benchmark 10-year Treasury note yields fell 6 basis points to 4.763% following the interest rate decision and Powell's commentary while 2-year notes eased 5 basis points to 4.958%.
FOMC Policy Decision: Market investors driving down the 2-yr yield which is a useful proxy for the policy rate. Market clearly thinks that the Fed is done hiking rates & I agree with that. pic.twitter.com/Nu9xBs484Z
— Joseph Brusuelas (@joebrusuelas) November 1, 2023
The U.S. dollar index, meanwhile, was marked 0.20% higher at 106.87 against a basket of six global currency peers. as the yen weakened further, to a one-year low of 151.21 against the dollar, following yesterday's Bank of Japan rate decision.
Markets had turned higher earlier in the session following a softer-than-expected reading for private sector job creation over the month of October from payroll processing group ADP, as well as an in-line forecast on new bond auction sales from the Treasury.
A weaker reading of October manufacturing activity, based on ISM survey data, also added to the pullback in Treasury bond yields.
Bond investors were also on high alert into the Treasury's quarterly refunding statement this morning, which indicated the sale of $112 billion in coupon-bearing bonds this quarter, a $9 billion increase from the three months ending in September but $2 billion shy of Street forecasts.
Investors will weigh of any extra supply to a market that is already feeling the affects of record budget deficits, which helped push 10-year note yields to a 2007 high of 5.027% last week, although the government's smaller-than-expected borrowing target of $776 billion has likely eased some of those concerns.
The Fed rate decision at 2:00 pm eastern time, with Chairman Jerome Powell's question-and-answer session with the media thirty minutes later, will undoubtedly be the day's focus, however, as investors look for more clarity on the central bank's rate path heading in to 2024 as the economy continues to outperform and the labor market adds to near-term inflation pressures.
Market volatility gauges inched lower into today's Fed announcement, with the CBOE Group's VIX index falling another 5% in Wednesday trading to sit at $17.50, suggesting traders are betting on daily swings for the S&P 500 of around 1.09%, or 46 points, over the next month.
In Europe, the region-wide Stoxx 600 was marked 0.66% higher by the close of Frankfurt trading, while Britain's added 0.28% in London.
Overnight in Asia, solid profits from Toyota, as well as an improved full-year outlook, helped the Nikkei 225 surge 2.41% over the session, with the region-wide MSCI ex-Japan index nudging 0.07% higher into the close of trading.
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