- The markets first cheered the lack of a Fed rate hike, then fell after its reasoning was explained
- The outlook for growth and inflation going out several years has been ratcheted down
- China could easily extend the losses.
The Federal Reserve gave traders the answer they sought, and the party was on. Then Fed chair Janet Yellen sought to explain her policy and the party was off.
In the end stocks ended the session down, after rising about 275 Dow points between 2 PM, when the decision was announced, and 3 PM. All those gains, and more, were given back, so the Dow (INDEX:INDU) finished down 65.21, .39%, at 16,674, the S&P (INDEX:SPAL) finished down 5.11 or .26% at 1,990, while the Nasdaq (INDEX:COMPX) eked out a small gain, finishing up 4.71, just .10% at 4,894.
So when will the Fed raise rates? “There will always be uncertainty,” said Chair Janet Yellen. “We want to give it a little more time.” The Fed’s forecast for future rates fell, and so did its inflation forecast, mainly because it cut its growth forecast – that’s what spooked the market. The Fed wants to see more economic stability worldwide before making a move.
After cheering the fact that rates would stay near zero for months more, traders went “uh oh” and sold.
Banks suffered the most, with JP Morgan (NYSE:JPM) finishing down 2.35% or $1.51 at $62.63, Wells Fargo (NYSE:WFC) losing 2.83% or $1.52 to $52.20, and Regions Financial (NYSE:RF) losing 2.93%, or 28 cents a share, and finishing at $9.29. Commercial banks like Goldman Sachs (NYSE:GS) didn’t get it quite as bad – it lost just 1.15%, $2.16/share, and finished at $186.48.
Regional banks like SunTrust (NYSE:STI) of Atlanta might have risen in the face of a rate hike, because it would show confidence in the real economy, and offer them fatter spreads for making loans. The stock opened with a modest gain and stayed to the upside until the Fed decision came in, after which it fell 50 cents, drifted slowly downward until 2.45, and then plunged about a dollar per share in a little more than a half-hour, finally finishing at $29.05, down 2.52% or $1.01/share.
What seemed clear after Yellen spoke is that what happens in China matters to the Federal Reserve. Before U.S. markets opened, the Shanghai composite fell another 2.15%, and the Hang Seng market fell .51%. Japan, which has been spending and pushing its currency down as much as possible, rose 1.43%.
The idea that the fate of the Chinese economy, which has been stuttering and remains very-much state-controlled, may be tied to U.S. interest rates seemed to spook many traders. What happens in China today will probably determine the state of the U.S. market when traders get back in the morning.
Europe didn’t know what to do, with the German DAX finishing nearly unchanged, up .02%, the French CAC-40 rising .40%, and the English FTSE falling .68%. Latin American markets were generally up.
Energy all over the Place
Energy prices also didn’t seem to know what to do. West Texas Intermediate futures were actually up a bit at mid-day, but then fell with the Fed announcement, the October contract losing 24 cents/barrel, .51%, $46.91. Brent crude had the same pattern, losing 52 cents or $1.05% on the November contract to $49.23. The spread between the two is now down to just $2.32, meaning the energy bargains are no longer a U.S. phenomenon, and a U.S. move to begin oil exports, which the White House opposes (without promising a veto) but Congress supports, is unlikely to make much of a difference.
So What Happens Now?
China will call the tune of the new day. If Shanghai keeps falling, it’s going to take other markets with it. It kept U.S. interest rates at the “zero bound” today, and the fear of a global recession, driven by China, is growing.
For a quick roundup of key news and events before the bell, check the daily news section - Markets This Morning.