US markets close lower after Fed decision 30 October 2014

by IFC Markets

The US markets slipped on Wednesday after the Fed statement confirmed the expected completion of the bond buying stimulus program and added language that ties the timing and pace of any future rate hike to incoming economic data.

The S&P 500 closed 2.75 points, or 0.1%, lower at 1,982.30. The Nasdaq Composite Index, which was already under pressure from Internet stocks lost 15 points, or 0.3%, to 4,549.23. Meanwhile, the Dow industrials dipped 31.44 points, or 0.2%, at 16,974.

While the end of Quantitative Easing was widely anticipated, investors were surprised with the Fed’s upbeat view on the labor market. The Fed’s view implies the U.S. economy is on firm footing but the markets had hoped for more signs that a low-rate policy would be maintained for an extended period. The Fed characterized the labor market conditions by stating that the range of labor market indicators suggests the under utilization of labor resources is gradually diminishing. This is an important departure from previous statement in which it had described the US labor market slack as “significant”.

Conditioning the future rate hikes on US economy performance the Fed nevertheless reconfirmed that interest rates would remain low for a "considerable time" following the end of the bond purchases this month.

Together with an assessment of improved labor market conditions the statement explicitly stated for the first time the Fed could raise interest rates sooner than markets have forecast, if the economy grows faster than the bank projects. Fed officials didn’t refer to recent financial turmoil or global economy weakness and the risks they pose to US economic growth, instead they repeated language from September that the likelihood of inflation running persistently below 2 percent has diminished somewhat.

The statement expressed confidence the US economic recovery would remain on track despite signs of a slowdown in many parts of the global economy. The investors were clearly expecting a more dovish assessment, and were particularly surprised by the Fed’s statement of possible sooner rate hikes than currently anticipated “if incoming information indicates faster progress toward the committee's employment and inflation objective than the committee now expects”.

Fed's Head Janet Yellen speaks in Washington today at 14:00 CET. And new economic data are coming out today in US: at 13:30 CET the third quarter US Gross Domestic Product estimates, the Core Personal Consumption Expenditure (QoQ) for the third quarter, Continuing Claims for the week ended October 18 and Initial Jobless Claims for the week ended October 25 will be released.

European stocks advanced on Wednesday ahead of the statement from the US Federal Open Market Committee. France’s CAC 40 index rose 0.2% to 4,120.37. Germany’s DAX 30 index gained 0.5% to 9,111.09. The U.K.’s FTSE 100 index picked up 0.8% to 6,455.85. The Stoxx Europe 600 index added 0.3% to 329.36, on track for its highest closing level in three weeks.

No major economic data were expected to be released during the day and markets anticipated the FOMC statement to announce the end of the quantitative easing program and issue a dovish guidance on interest rates. Stocks in Asia rose Wednesday ahead of a U.S. Federal Reserve announcement on quantitative easing and after a rally on Wall Street on Tuesday. The Nikkei gained 1.5% to 15,553.91, helped by a stronger dollar and earnings from heavyweights such as Nomura Holdings and Hitachi Construction Machinery.

On Thursday morning stocks in Japan rose as the Federal Reserve’s statement that the U.S. labor market was improving and interest rates would remain low for a "considerable time" boosted investor optimism about US economy. The Nikkei benchmark rose 0.7 percent to 15,665.24 points by mid-morning, the highest since October 9.

West Texas Intermediate Crude Oil fell from a one-week high after data from Energy Information Administration, the Energy Department’s statistical arm, showed crude stockpiles rose as output surged to a record high in the US, the world’s biggest oil consumer. WTI for December delivery dropped as much as 45 cents to $81.75 a barrel in electronic trading on the New York Mercantile Exchange, and was at $81.84 at 4:40 p.m. Seoul time. Brent Oil for December settlement declined as much as 32 cents, or 0.4 percent, to $86.80 a barrel on the London-based ICE Futures Europe exchange. The contract rose 1.3 percent yesterday.

Gold tumbled as markets priced in the reduced expectation of inflation after the Federal Reserve ended its bond purchasing program. Gold for immediate delivery dropped 1.4 percent to $1,211.68 an ounce at 3:49 pm New York time, heading for the biggest drop since October 3. Prices touched $1,208.50, the lowest since October 8. Goldman Sachs Group Inc. predicts gold prices will drop to $1,050 over the next 12 months as the US economy accelerates. Silver futures for delivery in December added 0.2 percent to $17.264 an ounce on the Comex. On the New York Mercantile Exchange, palladium futures for delivery in December advanced 0.9 percent to $800.70 an ounce. Prices rose for a ninth straight sessions, the longest rally since August 18. Platinum futures for January delivery gained 0.2 percent to $1,269.20 an ounce.

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