US close: Markets pop higher as Fed confirms tapering plans

FOMC agrees to shrink asset purchases, but offers no word on interest rates

dl federal reserve fed fomc usd us dollars sacks of cash dollar money pb — US Federal ReserveSharecast / Manuel Velasco from Pixabay

Stocks closed in positive territory on Wall Street on Wednesday, with the main indices popping above the waterline following the Fed’s decision to begin tapering bond purchases.

dl jerome powell federal reserve open market committee virtual press conference 3 november 2021 chair fomc fed jay pd — Fed chair Jerome PowellSharecast / public domain image

At the close, the Dow Jones Industrial Average was up 0.29% at 36,157.58, as the S&P 500 added 0.65% to 4,660.57 and the Nasdaq Composite climbed 1.04% to 15,811.58.

The Federal Open Market Committee (FOMC) sated traders’ expectations late in the day, confirming that it would begin tapering back its asset purchase programme later in the month.

It said that it would initially reduce Treasury note purchases by $10bn per month, and mortgage-backed securities by $5bn.

The Fed also adjusted its rhetoric on inflation, maintaining that recent runaway price increases were “transitory”, but added that was only an expectation at this stage.

Jerome Powell, chair of the central bank, said he was expecting inflationary pressures to linger “well into next year” in his post-meeting press conference.

“Our baseline expectation is that supply chain bottlenecks and shortages will persist well into next year and elevated inflation as well,” Powell said.

“As the pandemic supplies, supply chain bottlenecks will abate and growth will move up and as that happens inflation will decline from today’s elevated levels.”

Analyst Yash Chauhan of Validus Risk Management said the Fed statement was “exactly in line” with market expectations, acknowledging that “substantial further progress” had been made towards maximum employment and price stability to warrant the start of tapering, though it did stop short of giving any timeline in terms of a hike in rates.

“One significant change in the statement was that the Fed now believes that factors contributing to elevated inflation are 'expected' to be transitory, supporting the market’s view that supply chain disruptions could persist well into next year,” Chauhan noted.

“Powell emphasised the dual mandate of price stability and maximum employment, and said that rate lift-off would only occur once the latter had been reached.

“As expected, Powell refrained from sharing any numerical anchor to measure maximum employment and said that the Fed measures it using a wide range of figures, effectively keeping some wiggle room to adjust policy as required.”

On the economic front, consultancy ADP reported a 571,000 jump in private sector jobs during the month of October, well ahead of consensus expectations for an increase of 400,000, which was seen by some traders as a good omen ahead of Friday's non-farm payrolls.

The Institute for Supply Management's services sector purchasing managers' index (PMI), meanwhile, surprised to the upside, posting a record reading of 66.7.

That was a decent jump from September's print of 61.9, and well ahead of market forecasts for a reading of 61.8.

Finally, the latest data from the Mortgage Bankers’ Association revealed a 9.2% month-on-month drop in total mortgage applications in October, as the 30-year mortgage rate hit an eight-month high of 3.22%.

In equities, homeware retailer Bed Bath & Beyond jumped 15.22% after it announced a tie-up with America’s largest supermarket chain Kroger, and said it was ahead of schedule on share buybacks.

Kroger itself was 5% firmer by the closing bell.

Ride-hailing outfit Lyft was 8.19% higher after it posted a 73% rise in annual revenue after the close on Tuesday, while Humana managed gains of 0.51% after the insurer beat on both revenue and adjusted quarterly earnings.

On the downside, property marketing firm Zillow Group plunged 22.93% after it dropped the axe on its house-flipping operations, admitting it paid too much on a number of homes and expected to lose $550m on its misadventure in the second half.

Video games developer Activision Blizzard slid 14.06% after it delayed two releases and issued a lighter outlook than anticipated, while the New York Times publishing group fell 9.57% despite beating market expectations on earnings and reporting a positive outlook.

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