The Dow and S&P 500 turned positive Wednesday and the Nasdaq pared earlier losses as market participants digested the Federal Reserve’s latest monetary policy decision, wherein divided central bank officials delivered their second rate cut of the year.
Here were the main moves in the market at the end of regular equity trading:
The quarter-point cut to the benchmark interest rate brought the target range down to between 1.75% and 2.00%. The Federal Open Market Committee (FOMC) said the decision was “in light of the implications of global developments for the economy outlook as well as muted inflation pressures.”
The vote was 7-3 in favor of the move, with the majority of dissenters demonstrating a more hawkish bias. Kansas Fed President Esther George and Boston Fed President Eric Rosengren favored leaving rates unchanged at their previous levels. St. Louis Fed President James Bullard favored cutting rates more deeply by 50 basis points.
The Fed’s new projections show that central bank officials on median expect rates to stay at the new level through 2020. However, seven of 17 officials see one more 25 basis point cut as appropriate in 2019.
“Today Powell delivered a very hawkish policy rate cut. Although it met market expectations for a 25 basis point cut, the committee was split with officials divided on future rate moves,” Seema Shah, chief strategist at Principal Global Investors, wrote in an email. “In fairness, with recent economic data – such as industrial production growth and housing stats – tentatively suggesting that a trough in activity is approaching, a stabilization in growth is a more plausible scenario than an outright recession, so perhaps there is less need for further easing.”
The six weeks since the Fed’s July 31 rate decision have seen a bevy of global developments, which many investors had bet would make the case for further policy easing.
The U.S. and China each announced hikes to tariffs on one another’s imports throughout August, before de-escalating some of these threats at the start of September. A closely watched portion of the Treasury yield curve inverted for the first time in more than a decade, flashing a reliable recessionary signal.
And most recently, crude oil prices have surged – and then precipitously came back down – as market participants wrestled to keep pace with developments over Saudi Arabian oil supplies and geopolitical tensions after an attack on the country’s oil facilities.
Reining in rates
The latest monetary policy decision also included a move by the Fed to try and regain control over short-term financing rates. Over the past several days, Fed has scrambled to quell a spike in short-term money-market rates, with officials spending billions to infuse liquidity into the banking system and bring the rate back down to within the Fed’s target range.
To provide further relief to this issue, the Fed announced Wednesday that it would be lowering the rate it pays on reserves, bringing down both the IOER and reverse repo rate by 30 basis points – or further than the reduction in the Fed’s target range.
The sudden liquidity squeeze in the overnight repurchase agreements (repo) market – where banks and Wall Street dealers lend out to one another to meet their daily financing needs – this week had been the result of a demand issue, likely caused as borrowers sought to cover corporate tax payments and settlements of newly auction U.S. Treasuries.
In a press conference after the release of the Fed’s monetary policy decision, Fed Chair Jerome Powell said the Fed’s “temporary operations were effective in relieving funding pressures, and we expect the federal funds rate to move back into the target range.” He also noted that this week’s turmoil in money markets carry “no implications for the economy or the stance of monetary policy."
Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., September 17, 2019. REUTERS/Brendan McDermid
ECONOMY: New homebuilding jump to 12-year high
Housing starts, a metric tracking new homebuilding, jumped an estimates-beating 12.3% to a more than decade high in August, according to new data from the Commerce Department Wednesday.
The seasonally adjusted annual rate for U.S. homebuilding was at 1.364 million units in August, reaching the highest level since June 2007. Revised data also showed a shallower decline in July’s homebuilding to just 1.215 million units, from a decrease to a rate of 1.191 million units previously reported.
Meanwhile, building permits unexpectedly rose 7.7% in August to a seasonally adjusted pace of 1.419 million units, which also marked a 12-year high. Consensus economists had expected building permits to decline by 1.3% to a pace of 1.3 million units for the month, according to Bloomberg data. Building permits presage future construction.
Gains were broad-based for the month for both housing starts and permits, with three of four regions seeing increases in starts in August. The Midwest led advances, and saw the fastest rate of new homebuilding since mid-2018.
By category, the multi-family housing starts rose 32.8% in August and reversed two previous months of declines. However, this segment tends to be more volatile than the single-family category, which comprises the largest share of the housing market saw a 4.4% increase in starts for the month.
STOCKS: FedEx points to trade, end of Amazon agreement for weak earnings
Adjusted earnings of $3.05 per share on revenue of $17.05 billion missed expectations for earnings of $3.16 per share on total sales of $17.06 billion, according to Bloomberg-compiled estimates for the company’s fiscal first quarter. The company sees earnings of between $10.00 to $12.00 per share for fiscal 2020, excluding some items and before an accounting adjustment for its mark-to-market retirement plan.
FedEx CEO Fred Smith said its performance “continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty.” During a call with analysts Tuesday, management also said that “the loss of volume from Amazon had a negative impact to the quarter,” with FedEx having severed ties with the e-commerce giant and delivery rival over the summer by allowing FedEx Express and Ground agreements to conclude without renewal.
Meanwhile, newly public company Chewy (CHWY) posted a wider quarterly loss over last year, due in large part to higher stock-based compensation expenses after the company went public. Shares closed lower by 6% on Wednesday.
The online pet-product retailer’s net loss widened to $82.9 million for the quarter ending in August, from $63.1 million last year. But sales beat expectations, rising 43% to $1.15 billion, versus consensus estimates fo $1.13 billion. It also raised its fiscal year sales expectations to see revenue of between $4.75 billion to $4.80 billion, up from earlier guidance for between $4.68 billion and $4.75 billion.
Chewy’s active customers rose 39% over last year to 12 million, with net sales per active customer reaching $352.
