The initial market reaction to the Federal Reserve decision shows a stronger U.S. dollar and a sharp rise in shorter-term Treasury yields. The stock market reaction was more measured, although the Dow moved from a modest gain to a small loss.
The comparisons below show market levels immediately before the decision and approximately 12 minutes after the release.
Forex: U.S. dollar moves higher across the board
The dollar strengthened against all the major currencies:
- EURUSD: 1.1536 → 1.1502. The USD gained 34 pips.
- USDJPY: 155.04 → 155.37. The USD gained 33 pips.
- GBPUSD: 1.3447 → 1.3411. The USD gained 36 pips.
- USDCHF: 0.8184 → 0.8210. The USD gained 26 pips.
- USDCAD: 1.3938 → 1.3957. The USD gained 19 pips.
- AUDUSD: 0.7131 → 0.7113. The USD gained 18 pips.
- NZDUSD: 0.5759 → 0.5741. The USD gained 18 pips.
The broad-based dollar buying suggests that traders interpreted the decision and updated projections as more hawkish than what was priced into the market immediately before the announcement.
Treasury yields: Front end moves sharply higher
The largest yield increases were concentrated at the shorter end of the curve:
- 2-year yield: 4.606% → 4.6571%, an increase of 5.1 basis points.
- 5-year yield: 4.7646% → 4.7971%, an increase of 3.3 basis points.
- 10-year yield: 4.9466% → 4.9610%, an increase of 1.4 basis points.
- 30-year yield: 5.3285% → 5.3188%, a decline of 1.0 basis point.
The rise in the 2-year yield is particularly important because that maturity is more sensitive to expectations for Federal Reserve policy. The combination of rising short-term yields and a slightly lower 30-year yield resulted in a flatter yield curve.
That tells traders that the market is pricing a higher near-term policy path without necessarily increasing its longer-term growth and inflation expectations.
U.S. stocks: Dow turns negative, but technology holds its gains
The major indices moved as follows:
- Dow industrial average: 52,132.22 → 52,073.20, a decline of 59.02 points between the snapshots. The index moved from a gain of 34.02 points to a loss of 25.00 points.
- S&P 500: 7,612.56 → 7,611.11, a decline of 1.45 points. It remained higher by 25.37 points, or 0.33%.
- Nasdaq composite: 26,160.93 → 26,160.12, a decline of just 0.81 point. It remained higher by 178.55 points, or 0.69%.
- Russell 2000: 2,886.50 → 2,880.78, a decline of 5.72 points. Its gain narrowed to 10.49 points, or 0.37%.
- Nasdaq 100: 29,163.59 → 29,158.73, a decline of 4.86 points. It remained higher by 220.90 points, or 0.76%.
The Dow showed the clearest negative reaction, while the S&P, Nasdaq composite and Nasdaq 100 held most of their pre-decision gains.
Initial market takeaway
The most decisive reactions came from the dollar and the front end of the Treasury curve. Both point toward a more hawkish interpretation of the Fed announcement.
Stocks were less concerned, at least initially. The Dow weakened, but the technology-heavy Nasdaq indices remained comfortably higher. That makes the next phase of trading important as investors continue to digest the projections and the details from the Fed decision
That is just the initial reaction, there is a long way to go, with Warsh up next.
This article was written by Greg Michalowski at investinglive.com.