FED TAKES MORE DOVISH TONE ON RATE HIKES -- SHORTER RATES LEAD YIELDS LOWER -- TIPS REBOUND ON INCREASED INFLATION EXPECTATIONS -- DROP IN DOLLAR BOOSTS COMMODITIES -- CANADIAN DOLLAR CLEARS 200-DAY LINE -- S&P 500 EXTENDS GAIN OVER 200-DAY AVERAGE
FED SCALES BACKS 2016 RATE CUTS... The Fed left rates unchanged as expected. However, it also scaled back any potential rate hikes for this year. Previous estimates of three or four possible hikes were lowered to two. It also sounded more cautious on the global economy. Initial market reactions were pretty much in line with that more dovish tone. Shorter bond yields fell further than longer maturities (as to be expected). Utilities bounced with bonds, as banks dipped. The dollar dropped which boosted oil and other commodities. Commodity currencies like the Aussie and Canadian dollars rebounded. Stocks turned higher. Chart 1 shows the 5-Year Treasury Yield falling sharply from its 200-day average. Chart 2 shows Treasury Inflation Protection Bond iShares (TIP) having a strong day. That's the result higher inflation expectations from a lower dollar and higher commodity prices.
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Chart 1
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Chart 2
DOLLAR DROPS AS LOONIE CLEARS 200-DAY LINE... Chart 3 shows a sharp drop in the U.S. Dollar Index (UUP) today.. Its biggest losses came against commodity currencies like the Aussie and Canadian Dollar. Chart 4 shows the "loonie" clearing its 200-day average for the first time since 2014. Emerging market currencies are rallying as well. Foreign stocks are reacting to the upside, especially those tied to commodities. WTIC crude is up 5% today, while copper and gold have gained 2%. Energy stocks are the day's strongest sector.
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Chart 3
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Chart 4
S&P 500 SPDRS STAY ABOVE 200-DAY LINE... Stocks are extending their recent rally. Chart 5 shows the S&P 500 SPDRS (SPY) continuing to gain more ground after recently clearing their 200-day average. Also encouraging are the day's gains in consumer discretionary, technology, and industrials shares which are also above their 200-day lines. So is the drop in the CBOE Volatility (VIX) to the lowest level this year (Chart 6). That shows less fear and more optimism. All in all, a positive for risk on assets. We'll let the dust settle today and take more in-depth look tomorrow.
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Chart 5
