Fed minutes show officials comfortable with raising rates again
U.S. stocks reversed direction to close lower Thursday as investors’ attention shifted to a weekend meeting between President Donald Trump and Chinese President Xi Jinping amid some skepticism whether the two leaders can reach a consensus on trade.
Major indexes had earlier traded higher for a couple of hours following the release of the Federal Reserve minutes, which generally reaffirmed the central bank’s hawkish bias with the proviso that the policy-setting committee will maintain flexibility.
How did the benchmarks fare?
The Dow Jones Industrial Average YMZ8, -0.26% slid 27.59 points, or 0.1%, to 25,338.84, while the S&P 500 index SPX, +0.33% dropped 5.96 points, or 0.2%, to 2,737.83. The Nasdaq Composite Index COMP, +0.45% shed 18.51 points, or 0.3%, to 7,273.08.
On Wednesday, the Dow and the S&P 500 logged their best days since March 26 as a dovish interpretation of comments from Federal Reserve Chairman Jerome Powell revived buying interest.
What drove the market?
The Fed minutes from the central bank’s November meeting showed that almost every member of the Federal Open Market Committee felt comfortable with raising interest rates “fairly soon” as long as job market and inflation data were in line with expectations, bolstering expectations of another rate hike in December.
However, they did note that “monetary policy was not on a preset course,” reiterating the need to be flexible about monetary policy in 2019.
Investors are hoping that Trump and Xi will be able to make progress toward a deal, or at least hit on a framework for further negotiations, that would halt new or expanded tariffs on Chinese imports that the president has consistently threatened over the course of 2018.
Speaking to reporters, Trump said he was “close to doing something with China” but that he wasn’t sure he wanted to, citing revenue from tariffs on Chinese imports. Trump on Thursday tweeted that “billions of dollars” are pouring into the U.S. Treasury from tariffs and that there is “a long way to go.”
What data were in focus?
The number of Americans who applied for unemployment benefits last week rose to 234,000, their highest level in six months, according to the Labor Department, far above the 220,000 forecast of economists polled by MarketWatch. Still, those figures remain at historically low levels.
The Commerce Department reported that consumer spending in October rose by 0.6%, while income rose by 0.5%, above economists’ estimates, per a MarketWatch poll. The same release showed personal-consumption expenditures, the Fed’s preferred measure of inflation, right at the central bank’s target of 2% year-over-year.
The National Association of Realtors reported that U.S. pending home sales slid 2.6% in October from September, to their lowest level since June 2014.
What were strategists saying?
Ryan Nauman, market strategist with Informa Financial Intelligence, attributed Thursday’s pullback to two factors: investors re-evaluating just how dovish Fed Chair Powell’s Wednesday speech was, and anxiety over the Trump-Xi meeting.
“Powell said we’re ‘just below’ the neutral rate, but the neutral rate is a range between 2.5% and 3.5%. The Fed could raise rates three times next year and still be within that band,” Nauman told MarketWatch.
According to Nauman, the weakness is also related to U.S-China trade tensions, which he described as “the big elephant in the room.”
“If we get some indication of a pause on new tariffs, that will be great for markets,” he said. “If we get nothing much out of this weekend, you’ll see rising volatility. There’s a big concern about global growth slowing, and new tariffs will only hurt global growth.”
“As is typical with this market, the Fed chair gave an inch and the market took a yard,” wrote Mike O’Rourke, chief market strategist at JonesTrading, in a research note, arguing that while rising interest rates are a headwind for the market, they are not the only headwind.
“An FOMC pause will not drive more iPhone sales, or reduce Facebook’s expense growth, help Netflix subscriptions, drive Amazon’s sales or end the trade war,” O’Rourke wrote.
Which stocks were in focus?
Nielsen Holdings Plc. NLSN, +0.24% shares rose 4% after a Financial Times report that private-equity firm Madison Dearborn has shown interest in a possible buyout.
McDonald’s Corp. MCD, -0.28% shares were up 0.8%, after Morgan Stanley upgraded the stock to overweight.
Shares of Dollar Tree Inc. DLTR, -0.38% gained 6.1% after the firm beat third-quarter profit estimates, but fell short of expectations on sales and its full-year 2018 guidance.
Express Inc. EXPR, -4.19% tumbled 5% after the apparel retailer beat expectations for third-quarter sales and profit, but provided a downbeat outlook for the current quarter.
Shares of Abercrombie & Fitch Co. ANF, +1.79% surged 21% after the clothing company beat earnings and sales estimates by wide margins.
Quest Diagnostics Inc. DGX, -0.88% sank 9.3% after the lab-test company cut its revenue forecast for 2018.
Shares of Twitter Inc. TWTR, +0.06% slumped 4.4% after a report in Politico outlined Fox News’ silent boycott of the platform, having not posted on it since Nov. 8.
How are other markets trading?
Asian markets ended mostly higher, following the lead of U.S. markets on Wednesday. Japan’s Nikkei NIK, +0.40% rose 0.4%, it’s fifth-straight day of gains, while markets in Korea SEU, -0.82% and Australia XJO, -1.58% also logged gains.
Chinese markets were the exception, with Hong Kong’s Hang Seng Index HSI, +0.21% losing 0.9%, and the Shanghai Composite Index SHCOMP, +0.81% losing 1.3% as investors worry that this weekend’s Trump-Xi summit will provide no tariff relief for a slowing Chinese economy.
In Europe, stocks closed broadly higher, with the Stoxx Europe 600 SXXP, -0.13% advancing 0.2%.
Crude oil CLF9, -2.60% rebounded after dipping below $50 for the first time in over a year. Gold GCZ8, -0.55% settled mostly unchanged while the U.S. dollar DXY, +0.36% was flat.
