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T3’s Take 3: Hawks and Doves Collide on Fed Day


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1) Bank of Japan Starts a Party

The Japanese Nikkei and Topix indices had a great night after the Bank of Japan made its monetary policy announcement.

The Bank did not go deeper into negative rates as had been rumored, but will instead focus on controlling rates and steepening the yield curve.

A steeper yield curve means bigger profits for financial institutions, so Japanese banks and insurers staged huge rallies. The yen also rallied against major currencies.

Many investors have been concerned about the impact of negative rates, so the new strategy was received favorably.

The positive action in Japan flowed through to Europe, which also had a big stock rally with notable strength in financials.

2) The Fed!

As expected, the Fed left interest rates unchanged.

But what was really interesting was that they gave ammunition to both hawks and doves.

3 Fed officials dissented from the decision, voting to raise rates. The Fed also said that the rate hike case strengthened, which all but seals the deal for a December rate hike.

That certainly seems in-line with all the hawkish commentary we’ve been hearing from Fed officials.

However, the Fed now expects 2 rate increases in 2017, down from 3 in June.

The Fed also cuts its GDP and interest rate forecasts, and said that inflation is still below its goals.

So the overall picture is actually pretty mixed – and I’d argue that today may have been a victory for the doves.

3) The Market Reaction

For the third day in a row, the S&P 500 hit an early morning high before ticking lower.

However, the Fed statement ignited a very solid stock rally into the close, with the S&P rising 1.1% to 2162.87.

The Russell 2000 powered up 1.4% to 1245.02.

And since the Fed wasn’t as hawkish as many traders expected, we saw rallies in bonds and commodities after the announcement hit.

Meanwhile, the dollar fell sharply on Japan’s lack of action and the Fed’s mixed statement.

WTI Crude oil rose 3.5% after the American Petroleum Institute and Energy Information Administration reported large drops in US crude inventories. That had energy stocks in the winners’ column.

But the biggest hot mover today was the junior gold miners ETF (GDXJ), which rose a whopping 8.0% on the post-Fed pop in gold.

Thursday’s Trading Calendar

US Economics (Time Zone: EDT)

08:30 Chicago Fed Nat Activity Index (Aug): exp. 0.15, prior 0.27
08:30 Initial Jobless Claims (9/17): exp. 261k, prior 260k
08:30 Continuing Claims (9/10): exp. 2141k, prior 2143k
09:00 FHFA House Price Index MoM (Jul): exp. 0.30%, prior 0.20%
09:45 Bloomberg Economic Expectations (Sep): prior 44.5
09:45 Bloomberg Consumer Comfort (9/18): prior 42.2
10:00 Existing Home Sales (Aug): exp. 5.45m, prior 5.39m
10:00 Existing Home Sales MoM (Aug): exp. 1.10%, prior -3.20%
10:00 Leading Index (Aug): exp. 0.00%, prior 0.40%
10:30 EIA Natural Gas Storage Change (9/16): exp. 54, prior 62
10:30 EIA Working Natural Gas Implied Flow (9/16): exp. 54, prior 62
11:00 Kansas City Fed Manf. Activity (Sep): exp. -3, prior -4
13:00 Fed's Lockhart Gives Introductory Remarks on Labor Market

Global Economics

09:00 EUR ECB Pres. Draghi Speaks
13:00 GBP BOE Gov. Carney Speaks


Before Open:

Autozone (AZO)
Rite Aid Corp (RAD)

After Close:

None of Significance