U.S. markets showed continued strength on Thursday after the Federal Reserve laid out a new framework for how it will approach monetary policy and its dual mandates regarding inflation and employment. The gains helped push the Nasdaq and S&P 500 tag another round of all-time highs with the Dow briefly trading back in positive territory for the year.
The Russell 2000 rebounded but continues to struggle with near-term resistance and remains in negative territory for the year, along with the Dow. Meanwhile, volatility spike to its highest level this month but held key resistance levels into the closing bell.
The Dow was up for the 2nd-straight session and for the 5th time in 6 after climbing 0.6% with the afternoon peak reaching 28,634. Prior and lower resistance from late January at 28,500-28,750 was cleared but held by 8 points. A close above the latter would indicate further strength towards 29,000-29,250 with the all-time high at 29,568.
The Russell 2000 closed higher for the 3rd time in 4 sessions after adding 0.3% while topping out at 1,573 shortly after the open. Current and lower resistance at 1,570-1,585 was breached but held. A move above the latter would suggest another run towards 1,600-1,615.
The S&P 500 extended its winning streak to 6th-straight sessions after nudging up 0.2% and testing a lifetime high of 3,501. New and lower resistance at 3,500-3,525 was cleared but held. A pop above the latter would indicate additional upside towards 3,550-3,575.
The Nasdaq slipped 0.3% to snap a 5-session winning streak despite the intraday and record peak reaching 11,730. Unchartered territory and lower resistance at 11,700-11,800 was cleared but held. A close above the latter would signal additional momentum towards 11,900-12,000 while a close below 11,500 would signal a possible near-term top.
Financials were the strongest sector after soaring 1.7% while Real Estate and Healthcare advanced 1.3% and 0.8%, respectively. Communication Services paced sector laggards after sinking 1.2% while Consumer Discretionary and Materials were down 0.5% and 0.3% to round out the losers.
European markets closed lower across the board despite comments from European Central Bank chief economist Philip Lane who said the ECB stood ready to prop up inflation.
The Belgium20 sank 0.9% and UK’s FTSE 100 stumbled 0.8%. Germany’s DAX 30 dropped 0.7% while the Stoxx 600 and France’s CAC 40 declined 0.6%.
Asian markets were mixed following better-than-expected economic news out of China and no action on rates from South Korea’s central bank.
South Korea’s Kospi dropped 1.1% and Hong Kong’s Hang Seng lost 0.8%. Japan’s Nikkei fell 0.4%. China’s Shanghai rose 0.6% and Australia’s S&P/ASX 200 added 0.2%.
China’s industrial sector grew 19.6% from last year, an increase from the 11.5% gain in June, as the country’s recovery from the pandemic continues.
South Korea’s central bank kept its rates on hold at 0.5%, but cut its 2020 GDP forecast to -1.3% from a previous forecast for a 0.2% decline.
Initial Jobless Claims dropped -98,000 to 1,006,000 after rising 133,000 to 1,106,000 in the prior week. Expectations were at 987,000. This pushed the 4-week moving average down to 1,068,000 versus 1,175,250 previously. Seasonally adjusted claims contracted -68,000 to 821,600 after rising 50,800 previously. Continuing claims declined -233,000 to 14,535,000 following the -722,000 plunge to 14,758,000 in the prior week.
Q2 GDP was revised up to a -31.7% growth rate versus expectations of -32.9% and the contraction rate posted in the Advance report. Personal income was down -34.1% versus the prior Q2 -34.6% reading. Business fixed investment fell at a -26% rate compared to -27% previously. Residential investment dropped at a -37.9% rate versus -38.7%. Exports slide at a -63.2% clip, fractionally better than the prior -64.1% print, while imports were revised lower to a -54.0% clip from -53.4%. Net exports added 0.90% to GDP while inventories subtracted -3.46%. Government purchases were bumped up to a 2.8% pace from 2.7%. The chain price deflator was down -2% versus -1.8%, with the core rate at -1% versus -1.1%.
Pending Home Sales Index rose 5.9% to 122.1 in July after surging 15.4% to 115.3 in June. This represents the highest level since October 2005, as the index has bounced off of its 69 record low from April. The index is up 15.4% year-over-year versus the 11.8% pace in June.
Kansas City Fed Manufacturing Index checked in at 14 versus forecasts for a print of 2.
The Federal Open Market Committee of the Federal Reserve announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and serves as the foundation for its policy actions. The updates reflect changes in the economy over the past decade and how policymakers are taking these changes into account in conducting monetary policy. The updated statement is also intended to enhance the transparency, accountability and effectiveness of monetary policy, the Fed stated.
On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its assessments of the shortfalls of employment from its maximum level. The original document referred to deviations from its maximum level. On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2% by noting that it seeks to achieve inflation that averages 2% over time. To this end, the revised statement states that following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.
The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.
Fed Chairman Powell confirmed a shift, as the Fed now seeks inflation that averages 2% over time. He said this will allow prices to run moderately hotter than 2%, the prior goal, following periods when inflation has been running persistently below 2%. Regarding inflation, Powell said the new approach will not dictate policy outcomes and could be viewed as a flexible form of average inflation targeting. He added analysts are not tying ourselves to a particular mathematical formula that defines the average.
Powell stressed any inflation overshoots will be moderate and not permanent. On employment he said the the Fed will assess shortfalls of employment from its maxim level and will undertake a policy review every five years. Powell did not that public faith in institutions has been under pressure and this review is an attempt to restore faith as it looks to increase transparency and accountability.
The iShares 20+ Year Treasury Bond ETF (TLT) was down for the 4th-straight session after testing a late day low of $161.16. Prior and upper support from late June at $161.50-$161 failed to hold. A close below the latter would indicate additional weakness towards $160-$159.50.
Lowered resistance is at $162-$162.50 followed by $164.50-$165.
The S&P 500 Volatility Index ($VIX) was up for the 2nd-straight session after zooming to a midday and monthly peak of 27.09. Prior and lower resistance at 27-27.50 was breached but held. A close above 28 and the 200-day moving average would be a bearish signal for the market and indicate further upside towards 29.50-30.
New support at 23.50-23 followed by 22.50-22.
The Spider Small-Cap 600 ETF (SLY) showed strength for the 3rd time in 4 sessions after trading to a morning high of $64.81. Current and lower resistance at $64.50-$65 was cleared but held. A close above the latter would indicate a retest towards $66.50-$67 with the monthly peak at $66.59.
Support is at $64-$63.50. A close below the latter would be a slightly bearish development with additional pullback potential towards $62.50-$62.
RSI is in a slight uptrend with key resistance at 60 holding. Continued closes above this level would signal strength towards 65-70 with the latter representing the monthly top. Support is at 55-50.
The Utilities Select Spider (XLU) was up for the 1st time in 3 sessions following the intraday rebound to $59.31. Near-term and lower resistance at $59-$59.50 and the 50-day moving average were cleared but levels that held. A close above the latter would be a bullish signal for a retest towards $60-$60.50 and the 200-day moving average.
Current support is at $58.50-$58. A move below the latter would suggest additional weakness towards $57-$56.50 and levels from mid-July.
RSI is trying to curl higher with resistance at 45-50 holding. A move above the latter would indicate additional strength towards 55-60. Support is at 40-35.