The Federal Reserve, as expected, raised interest rates by 0.25% on Wednesday for the second time in three months — a dramatic quickening of the prior pace of just two rate hikes in the last 10 years, and a boost to the S&P 500 and other major stock indices.
It was a “hawkish hike” with future rate hike expectations drifting higher as well. The Fed continues to pencil in another two rate hikes for the rest of the year. And it now expects long-term interest rates to reach 3% by the end of 2019, a slight increase from its last forecast back in December.
Yet markets responded in the opposite way you would expect, suggesting that markets were bracing for an even more aggressive rate hike forecast. Stocks rose. Bonds rose. Precious metals rose. And the dollar weakened.
Bank of America Corp (NYSE:BAC), which benefits heavily from higher interest rates, reversed after the decision — a “sell the news” event.
This is surprising, especially in light of the fact that Atlanta Fed lowered its Q1 GDP growth estimate to just 0.9% heading into the day’s decision — suggesting the economy could be suffering a bout of weakness.
In the end, the Dow Jones Industrial Average gained 0.5%, the S&P 500 gained 0.8%, the Nasdaq Composite gained 0.7%, and the Russell 2000 gained 1.5%. Treasury bonds rallied, the dollar fell 1%, gold rallied 1% after the close, and oil gained 2.4% to recover from its recent selloff.
Movers and Shakers
Energy stocks led the way with a 2.1% gain, followed by rate-sensitive REITs, up 1.9%.
Financials were the laggards, down 0.1%, which is also surprising since the sector has been leading the charge since Election Day on hopes higher long-term interest rates would boost net interest margins and thus profitability. As a result, Goldman Sachs Group Inc (NYSE:GS) fell for its eighth consecutive session — the longest losing streak for the Wall Street icon since May 2008, in the heart of the financial crisis.
Harley-Davidson Inc (NYSE:HOG) rose 4.7% after being upgraded to neutral by analysts at Longbow Research noting channel checks point to stronger-than-expected sell through. Occidental Petroleum Corporation (NYSE:OXY) gained 3.2% after being upgraded to buy from neutral by Bank of America Merrill Lynch.
On the downside, flower delivery company FTD Companies Inc (NASDAQ:FTD) fell 23.7% after Q4 earnings and revenues missed expectations on a 7.9% decline in consumer orders. And Capital One Financial Corp. (NYSE:COF) fell 2% after February master trust data showed card-loan decline was greater than the expected seasonal downshift.
Economic Headlines Rule the Day
Along with the Fed announcement, there were a number of other economy-related headlines. Retail sales lifted in-line with expectations rising 0.1% month-over-month in February after a 0.6% gain in January. Yet this represented the smallest gain in six months. Core sales were up 0.1% after January’s 0.8% increase, which was less than the 0.2% gain expected.
The drop in sales was the reason the Atlanta Fed’s GDPNow measure dropped to 0.9% for the first quarter.
On the inflation front, consumer price inflation increased a bit more than expected pushing the annual rate to 2.7% from the 2.5% rate in January. Core CPI, leaving out food and fuel prices, rose at a 2.3% annual rate.
As shown in the chart above, this is a significant steepening of recent price pressure; supporting the Fed’s decision to raise rates today. There is some chatter, however, that inflation will likely cool in the months to come due to the recent decline in energy prices.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
