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Closing Market Summary: Stocks Rebound Intraday Following FOMC Minutes

The stock market earned a hard-fought victory on Wednesday, boosted by the afternoon release of the FOMC minutes from the May meeting, which came in more dovish than expected, helping the market overcome a lower start to the session. The Dow Jones Industrial Average climbed 0.2%, the S&P 500 advanced 0.3%, and the tech-heavy Nasdaq Composite jumped 0.6%. Small caps also ended the day higher, with the Russell 2000 adding 0.2%.

Lingering concerns about U.S.-China trade relations and doubts that the U.S.-North Korea summit will take place as scheduled weighed on the equity market at the start of Wednesday's session. The major stock indices opened with losses of around 0.4% apiece and stayed at, or near, that level all the way into the afternoon.

However, things turned around following the release of the FOMC minutes from the May meeting, which pointed to a rate hike in June, as expected, and suggested that the Fed may not be as aggressive with its rate hikes as many had previously thought. The latter takeaway stems from the acknowledgement in the minutes that officials would be content to let inflation briefly run above their 2.0% target.

Stocks shot higher following the minutes release, while the 'Fed-sensitive' 2-yr Treasury yield dropped sharply. The 2-yr yield was hovering around 2.58% ahead of the minutes, but eventually finished three basis points below its Tuesday close at 2.53%. Meanwhile, the benchmark 10-yr yield lost six basis points on Wednesday, dropping to 3.00%, amid fears of a populist government in Italy, whose agenda will surely drive up budget deficits. The Italian populist fears also weighed on the euro, helping to push the U.S. Dollar Index up 0.4% to 93.88, a fresh five-month high.

Back to yields, the narrowing gap between the 2-yr yield and the 10-yr yield weighed on financials, which rely on the difference between what they pay for deposits and what they receive for loans. The financial sector was the worst-performing S&P group on Wednesday, losing 0.6%. Telecom services also struggled, dropping 0.4%, but no other sector lost more than 0.2%, and most finished in the green.

Information technology finished alongside utilities at the top of the sector standings, adding 0.9%, with Netflix (NFLX 344.72, +13.10) leading the charge. Netflix shares rallied 4.0%, closing at a new record high. Meanwhile, tech giants Apple (AAPL 188.36, +1.20), Microsoft (MSFT 98.66, +1.16), Facebook (FB 186.90, +3.10), and Alphabet (GOOG 1079.69, +9.96) added between 0.6% and 1.7%. Chipmakers outperformed slightly, pushing the PHLX Semiconductor Index higher by 0.5%.

The consumer discretionary space was also a notable outperformer, adding 0.8%. Home improvement retailer Lowe's (LOW 94.69, +8.94) led the sector higher after news that Bill Ackman's Pershing Square has taken a $1 billion stake in the company -- which outweighed Lowe's below-consensus first quarter results. Lowe's shares rallied 10.4%, closing at a three-month high.

Meanwhile, shares of Tiffany & Co (TIF 126.05, +23.81) spiked 23.3%, hitting a new all-time high, after the luxury jewelry retailer beat quarterly earnings and revenue estimates, raised its guidance, and authorized a new share repurchase program. Shares of Target (TGT 71.17, -4.30), however, dropped 5.7% after the company missed on the bottom line.

Reviewing Wednesday's economic data, which included April New Home Sales and the weekly MBA Mortgage Applications Index:

• New Home Sales in April hit an annualized rate of 662,000, below the consensus of 677,000. The March reading was revised to 672,000 (from 694,000).
  • The key takeaway from the report is that lower-priced homes ($399,999 or less) accounted for a smaller percentage of new homes sold in April than the prior month, reflecting perhaps the lack of supply at more attractive price points for prospective buyers.
• The weekly MBA Mortgage Applications Index decreased 2.6% following last week's decline of 2.7%.

Looking ahead, investors will receive weekly Initial Claims, the FHFA Housing Price Index for March, and Existing Home Sales for April on Thursday.

• Nasdaq Composite +7.6% YTD
• Russell 2000 +6.0% YTD
• S&P 500 +2.2% YTD
• Dow Jones Industrial Average +0.7% YTD

FOMC Minutes: Notable Excerpts

• IOER Comments: In their discussion of this issue, participants generally agreed that it could become appropriate to make a small technical adjustment in the Federal Reserve's approach to implementing monetary policy by setting the IOER rate modestly below the top of the target range for the federal funds rate...
• Next Step: Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation...
• Rate Path: Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected...
• Inflation: A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would likely move slightly above the Committee's 2 percent objective for a time. It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective...
• Flattening Yield Curve: Meeting participants also discussed the recent flatter profile of the term structure of interest rates. Participants pointed to a number of factors contributing to the flattening of the yield curve, including the expected gradual rise of the federal funds rate, the downward pressure on term premiums from the Federal Reserve's still-large balance sheet as well as asset purchase programs by other central banks, and a reduction in investors' estimates of the longer-run neutral real interest rate. A few participants noted that such factors could make the slope of the yield curve a less reliable signal of future economic activity. However, several participants thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession.
• Neutral Level: In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level. In light of this, some participants noted it might soon be appropriate to revise the forward-guidance language in the statement indicating that the "federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run" or to modify the language stating that "the stance of monetary policy remains accommodative." Participants expressed a range of views on the amount of further policy firming that would likely be required over the medium term to achieve the Committee's goals....
• Trade: Early in the intermeeting period, uncertainty over trade policy and negative news about the technology sector reportedly contributed to lower prices for risky assets, but these concerns subsequently seemed to recede amid stronger-than-expected corporate earnings reports...
• Wage Pressures: Some participants saw a risk that, as resource utilization continued to tighten, supply constraints could develop that would intensify upward wage and price pressures, or that financial imbalances could emerge, which could eventually erode the sustainability of the economic expansion. Alternatively, some participants thought that a strengthening labor market could bring a further increase in labor supply, allowing the unemployment rate to decline further with less upward pressure on wages and prices. Another area of uncertainty was the outlook for fiscal and trade policies....
• Dollar Funding Costs: While term LIBOR (London interbank offered rates) had widened relative to comparablematurity OIS (overnight index swap) rates in recent months, the cost of dollar funding through the foreign exchange swap market had not risen to the same degree. Recent usage of standing U.S. dollar liquidity swap lines had been low, consistent with a view that the recent widening in LIBOR--OIS spreads did not reflect increased funding pressures or rising concerns about the condition of financial institutions....
• Dollar Activity: Financial conditions tightened somewhat over the intermeeting period but remained accommodative overall. The foreign exchange value of the dollar rose modestly, but this move retraced only a bit of the depreciation of the dollar since its 2016 peak...
• Asset Valuations Remain Elevated: In commenting on the staff's assessment of financial stability, a couple of participants noted that after the bout of financial market volatility in early February, the use of investment strategies predicated on a low-volatility environment may have become less prevalent, and that some investors may have become more cautious. However, asset valuations across a range of markets and leverage in the nonfinancial corporate sector remained elevated relative to historical norms, leaving some borrowers vulnerable to unexpected negative shocks.
• Countercyclical Buffers: With regard to the ability of the financial system to absorb such shocks, several participants commented that regulatory reforms since the crisis had contributed to appreciably stronger capital and liquidity positions in the financial sector. In this context, a few participants emphasized the need to build additional resilience in the financial sector at this point in the economic expansion.