The Federal Reserve, as expected, held off on raising interest rates at its October policy meeting because of lingering concerns about inflation as well as global economic and financial developments.
But it raised the stakes for its December statement and press conference, removing language from its policy statement about near-term pressures on inflation, while adding a line about how it’s monitoring the economic data to determine whether it will be appropriate to raise interest rates “at its next meeting.”
The futures market responded by increasing the odds of a December rate hike to above 40%, pushing stocks down from their morning highs into the red. But then a powerful end-of-day surge pushed U.S. equities to close at the highs of the day — keeping with the tradition of neck snapping price volatility on Fed days.
In the end, the Dow Jones Industrial Average gained 1.1% to move closer to the 18,000 benchmark last crossed in July, the S&P 500 moved up 1.2%, the Nasdaq Composite gained 1.3% and the Russell 20000 ended the day 2.9% higher.
The dollar was stronger (on rising rate hike expectations), causing gold to give up its morning rally. Oil maintained its gains, rising 6.4% to $45.98 a barrel, on lower Cushing inventories and larger-than-expected inventory draws of gasoline and distillates.
Apple, Inc. (NASDAQ:AAPL) gained 4.1% as investors responded to Tuesday night’s better-than-expected results. That pushed the November $115 AAPL calls recommended to Edge Pro subscribers on Oct. 22 to a gain of 42%. Twitter Inc. (NYSE:TWTR) recovered from a big after-hours post-earnings drop on Tuesday, driven by sluggish user metrics despite a top- and bottom-line beat, to finish with a 1.5% loss.
Northrop Grumman Corporation (NYSE:NOC) gained 5.5% after winning a $20 billion plus contract from the Pentagon to build a new long-range bomber. Akamai Technologies, Inc. (NASDAQ:AKAM) dropped 16.7% after reporting a Q3 earnings beat but issuing below consensus guidance. Yelp Inc. (NYSE:YELP) dropped 3.6% after being initiated with a “sell” rating by analysts at Roth Capital who are worried about its stronghold in local search being threatened by larger competitors with larger user bases.
Financial stocks were the big winners on the Fed news, as expectations for an interest rate hike boosted long-term yields and thus lifted net interest margins. The group gained 2.4% with Citigroup Inc (NYSE:C) up 4% and Bank of America Corp (NYSE:BAC) up an impressive 5.4%.
The breakouts I’ve been waiting for — and recently covered in an article here — boosted the November BAC and C calls recommended to Edge Pro subscribers to gains of 230% and 86% respectively since recommended on Oct. 9.
The same interest rate dynamic hit yield-sensitive utility stocks, however, pushing the group down 1.1%.
Looking ahead, the flow of economic data and the takeaway from Fed speeches will only increase in importance now that the Fed has talked up the chances of a December rate hike.
Societe Generale economist Aneta Markowska have bumped up their odds of a December hike to 45% from 40% before. They note the Fed softened its language on the labor market (“the pace of job gains slowed”) but buffed its language on domestic demand despite disappointing retail sales and durable goods reports recently.
We’ll know more on Thursday when Atlanta Fed President Dennis Lockhart speaks and the government releases its initial estimate of Q3 GDP growth.
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