U.S. Stocks Rise as Central Banks Signal Gradual Tightening

Date : 06/14/2018 @ 2:21PM
Source : Dow Jones News

U.S. Stocks Rise as Central Banks Signal Gradual Tightening

By Jon Sindreu 

U.S. stocks bounced back Thursday, suggesting investors are coming to terms with central banks' gradual plans to leave behind a decade of unprecedented monetary stimulus.

The Dow Jones Industrial Average added 82 points, or 0.3%, to 25283 shortly after the opening bell, while the S&P 500 rose 0.3% and the Nasdaq Composite gained 0.6%.

After the Federal Reserve signaled Wednesday that U.S. interest rates will likely go up four times in 2018 -- instead of three, as had been widely believed -- the European Central Bank said Thursday that it would end its bond-buying program in December, but reassured markets by pledging that rates in the eurozone won't start to rise at least until summer of next year.

Strong U.S. economic data also helped buoy stocks. Retail sales for May rose 0.8% from a month earlier to $502 billion, the biggest one-month jump since November. The number of workers filing new claims for unemployment benefits fell below expectations, a signal of a further tightening labor market. The number of claims workers made for longer than a week decreased to its lowest level since 1973.

The Fed on Wednesday raised its benchmark rate by another quarter-percentage point to a range between 1.75% and 2%, with eight out of 15 rate-setters now expecting two more increases this year. There is a 57% chance that this will happen, according to CME Group 's analysis of derivatives markets.

The Stoxx Europe 600 climbed 0.7%, recouping earlier losses after the ECB announcement. Asian stock markets closed down.

The euro dropped 0.5% against the dollar and the yield on 10-year German government bonds edged lower to 0.469% from 0.494%, a sign that investors saw the ECB's decision as leaving more market stimulus than previously expected.

The WSJ Dollar Index, which measures the U.S. dollar against a basket of currencies, rose 0.4% Thursday, with 10-year Treasury yields trading at 2.947% after settling at 2.979% the previous day.

Money managers were widely expecting the ECB to announce the end of debt purchases in December, but some were worried that tighter policy could negatively affect the eurozone economy, which has been showing signs of losing some momentum.

"For the last six months, we've been less optimistic about the outlook relative to the consensus forecast, which got carried away near the end of the year," said Abi Oladimeji, chief investment officer at Thomas Miller Investment.

However, investors were positively surprised by ECB officials saying in a statement that they expect key interest rates to remain unchanged at least through the summer of 2019, suggesting that policy will remain more expansionary that investors were expecting.

"This is, at least partly, an unexpected communication twist," Carsten Brzeski, economist at Dutch bank ING, wrote to clients, who believes the ECB has managed to please market expectations on both sides. "Today's decision is a truly Solomonic compromise between the hawks and the doves."

Italy's political woes had also created speculation that officials there will keep easy policy in place for longer to calm bond markets. Spreads between the 10-year government-bond yields of Italy and Germany have widened over the past month on the back of concerns that Italy's new antiestablishment government could force the country out of the eurozone.

Yet, bond markets have stabilized in the past week, and ECB officials recently hinted at their plans being unchanged.

"I don't think the pressure is on them anymore with Italian spreads having come down," said Colin McLean, chief investment officer at SVM Asset Management.

Higher rates tend to be a depressing force for financial assets -- because the returns offered by stocks and bonds become less attractive by comparison -- but this can often be offset if investors expect economic growth to be stronger as well.

"There's nothing in the data to suggest that economies aren't continuing to improve," said Peter Elston, chief investment officer at Seneca Investment Managers.

Mr. Elston, however, has been slowly cutting his exposure to risky assets because he believes an economic slowdown will eventually happen, likely over a year from now.

Another of the world's top central banks, the Bank of Japan, is scheduled to make a policy announcement Friday.

Danielle Chemtob contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com


(END) Dow Jones Newswires

June 14, 2018 10:06 ET (14:06 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.

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