The S&P 500 (-0.8%), Dow Jones Industrial Average (-0.5%), And Russell 2000 (-2.8%) Set Intraday And Closing Record Highs In The First Half Of The Week, But They Eventually Ran Into Selling Pressure As Long-Term Interest Rates Continued To Move Higher. The Nasdaq Composite Declined 0.8%, While The Russell 2000 Diverged With A Sharp 3% Decline.
Starting with the most consequential event this week, the FOMC and Fed Chair Powell struck a dovish and patient tone regarding monetary policy following their two-day policy meeting on Wednesday, which satisfied the market and temporarily calmed down the Treasury market.
Reviewing the highlights and takeaways: There were no changes to 1) the fed funds rate, 2) the median estimate that the fed funds rate would remain unchanged through 2023, and 3) the pace of asset purchases (at least $120 billion per month). Fed Chair Powell said it wouldn't be time to start talking about tapering until the Fed sees actual substantial progress on employment and inflation.
Over the next couple of days, the 10-yr yield flirted with 1.76% amid persisting growth and inflation expectations (Fed won't intervene despite expected transitory inflation pressures this year). Selling interest was further supported by the Bank of Japan widening its trading band around 0.00% for the 10-yr JGB to 50 basis points (from 40 basis points) and the Fed letting the Supplementary Leverage Ratio (SLR) exemption expire on March 31.
The 10-yr yield ultimately settled at 1.73%, or nine basis points above last week's settlement. The higher rates worked against the growth stocks within the information technology sector (-1.4%). The energy (-7.7%), financials (-1.7%), and real estate (-1.0%) sectors also underperformed. The communication services (+0.5%), health care (+0.4%), and consumer staples (+0.2%) sectors closed higher.
Evidently, the energy sector, which dropped 7.7%, was a victim of profit-taking activity after a strong first quarter. WTI crude futures fell 6.3% to $61.45/bbl amid some lingering concerns about the recovery in global oil demand due to Europe struggling with another rise in coronavirus cases.
Economic data was mixed. February retail sales, industrial production, and housing starts/permits data were softer than expected, while the Philadelphia Fed Index soared to 51.8 in March (Briefing.com consensus 23.5) from 23.1 in February. Many think the data will turn more positive in March like the Philly Fed Index, as the $1.9 trillion stimulus package trickles through the economy.