U.S. equities finished mostly higher on Wednesday, but financial shares struggled following the Fed's latest policy directive.
The Dow Jones Industrial Average settled at a new record high for the fourth session in a row, adding 0.3%. The Nasdaq Composite also finished higher, adding 0.2%, but the S&P 500 settled with a slim loss of 0.1%. The benchmark index held a modest gain for much of the day, but fell sharply in the final minutes of trading.
Small caps showed relative strength, pushing the Russell 2000 higher by 0.6%.
As expected, the Federal Open Market Committee raised the fed funds target range by 25 basis points to 1.25%-1.50% on Wednesday, marking the third rate hike of 2017. Chicago Fed President Evans and Minneapolis Fed President Kashkari--the FOMC's two most dovish members--dissented, saying they preferred to keep the target range unchanged.
The Fed's so-called "dot plot" revealed that the median FOMC member still anticipates three rate hikes in 2018 and two in 2019. Both figures were unchanged from the projections released in September, even though the central bank acknowledged that overall inflation and core inflation have declined this year and are running below 2.0%.
U.S. Treasuries rallied in a curve-flattening trade, underpinned by both the Fed's policy statement and a smaller-than-expected increase in the core Consumer Price Index for November (+0.1% actual vs +0.2% Briefing.com consensus). The yield on the benchmark 10-yr Treasury note tumbled five basis points to 2.35%, while the 2-yr yield slipped two basis points to 1.79%.
The flattening of the yield curve weighed heavily on the financial sector, which is second only to technology in terms of weight, representing nearly 15.0% of the broader market. The financial space dropped 1.3%, mitigating gains registered in most other areas.
In total, seven of eleven sectors finished in the green, but gains were limited; no group advanced more than 0.5%.
On the political front, House and Senate Republicans reached an agreement of the final version of a tax reform bill on Wednesday, putting President Trump's first major legislative victory within reach. The full details of the bill will be released later in the week and votes are scheduled to take place in both chambers sometime next week.
Reports indicate that the bill would cut the corporate tax rate to 21%--which is slightly higher than the 20% rate that the GOP was originally shooting for, but still significantly below the current rate of 35%. The new corporate tax rate would take effect in 2018, which is faster than the 2019 start date in the Senate's version of the bill.
It's also worth pointing out that Democrat Doug Jones defeated Republican Roy Moore in a special election for Alabama's open U.S. Senate seat. Mr. Jones' victory will reduce the GOP's majority in the Senate from 52-48 to 51-49, but it is not expected to impact tax reform as Mr. Jones will not take the oath of office for a few weeks.
In corporate news, Caterpillar (CAT 148.57, +5.15) jumped 3.6%, settling at a new record high, after reporting a year-over-year increase of 26% in November machine sales. Target (TGT 62.67, +1.65) also advanced, adding 2.7%, after announcing that it will acquire Shipt, an internet-based grocery delivery service, for $550 million in cash.
Conversely, 21st Century Fox (FOXA 32.75, -1.35) lost 4.0% following reports that a deal with Walt Disney (DIS 107.61, +0.18) could be announced as soon as Thursday. As a reminder, Disney is reported to be interested in acquiring around $60 billion of assets from 21st Century Fox.
Elsewhere, equities had a weak showing in Europe, with the Euro Stoxx 50 moving lower by 0.5%, while the major stock indices in the Asia-Pacific region finished Wednesday mixed. Japan's Nikkei lost 0.5%, while Hong Kong's Hang Seng and China's Shanghai Composite jumped 1.5% and 0.7%, respectively.
Reviewing Wednesday's economic data, which included the November Consumer Price Index and the weekly MBA Mortgage Applications Index:
- Total CPI increased 0.4% (Briefing.com consensus +0.4%) in November while core CPI, which excludes food and energy, rose 0.1% (Briefing.com consensus +0.2%). On a year-over-year basis, total CPI and core CPI are up 2.2% and 1.7%, respectively.
- The key takeaway from the report is that it didn't signal any alarming consumer inflation pressures, which will leave market participants predisposed to think that the Federal Reserve is apt to continue following a gradual tightening path.
- The weekly MBA Mortgage Applications Index decreased 2.3% to follow last week's 4.7% increase.
On Friday, investors will receive November Retail Sales (Briefing.com consensus +0.3%), weekly Initial Claims (Briefing.com consensus 239K), and November Export/Import Prices at 8:30 ET, followed by October Business Inventories (Briefing.com consensus -0.1%) at 10:00 ET.
- Nasdaq Composite +27.7% YTD
- Dow Jones Industrial Average +24.4% YTD
- S&P 500 +18.9% YTD
- Russell 2000 +12.3% YTD