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Stocks Close Mostly Lower After Fed Hikes Rates - U.S. Commentary


Stocks saw modest strength for much of the trading session on Wednesday but came under pressure following the Federal Reserve's monetary policy announcement. The Nasdaq reached a record intraday high but pulled back into negative territory along with the other major averages.

The major averages all closed in the red, although the tech-heavy Nasdaq edged down just 8.10 points or 0.1 percent to 7,695.70. The Dow slid 119.53 points or 0.5 percent to 25,201.20 and the S&P 500 fell 11.22 points or 0.4 percent to 2,775.63.

The pullback by stocks came after the Fed announced its decision to raise interest rates by 25 basis points to a range of 1.75 percent to 2 percent.

While the rate hike was widely expected, the Fed seemed to surprise investors by forecasting two additional rate hikes this year after previously predicting one rate increase.

"With growth rebounding following the typical first quarter soft patch, and inflation continuing to accelerate, we have been penciling in a total of four hikes for this year," said ING economist James Smith. "Looking at the latest 'dot plot,' it seems the Fed is increasingly heading in this direction too."

The Fed reiterated that it expects further gradual rate increases but dropped language predicting rates are likely to remain below levels that are expected to prevail in the longer run.

The central bank said data received since its May meeting indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.

Annual overall inflation and core inflation have moved close to 2 percent, the Fed said and noted indicators of longer-term inflation expectations are little changed.

On the U.S. economic front, the Labor Department released a report showing a bigger than expected increase in producer prices in the month of May.

The Labor Department said its producer price index for final demand climbed by 0.5 percent in May after inching up by 0.1 percent in April. Economists had expected producer prices to rise by 0.3 percent.

Excluding food and energy prices, core producer prices rose by 0.3 percent in May after edging up by 0.2 percent in April. Core prices had been expected to show another 0.2 percent increase.

The report said the annual rate of producer price growth accelerated to 3.1 percent in May from 2.6 percent in April, reaching its highest level in over six years.

The annual rate of growth in core producer prices also ticked up to 2.6 percent in May from 2.5 percent in the previous month.

"The rebound in producer price inflation in May supports our view that core consumer price inflation will trend higher over the rest of this year," said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, "That will keep the pressure on the Fed to keep raising interest rates once a quarter over the next year or so."

Sector News

Housing stocks moved sharply lower over the course of the session, with the Philadelphia Housing Sector Index plunging by 2.9 percent. The steep drop by the index came after it ended the previous session at its best closing level in almost two months.

The pullback by housing stocks partly reflected concerns about the impact of higher interest rates following the Fed announcement.

Rate-sensitive commercial real estate stocks also came under pressure, dragging the Dow Jones Retail Index down by 2 percent. The index ended the previous session at a five-month closing high.

Telecom and chemical stocks also saw notable weakness on the day, moving lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower on Wednesday. China's Shanghai Composite Index and Hong Kong's Hang Seng Index slumped by 1 percent and 1.2 percent, respectively. However, Japan's Nikkei 225 Index bucked the downtrend.

Meanwhile, the major European markets turned in a lackluster performance on the day. While the German DAX Index rose by 0.4 percent, the U.K.'s FTSE 100 Index and the French CAC 40 Index ended the day nearly unchanged.

In the bond market, treasuries showed a lack of direction for much of the session but came under pressure following the Fed announcement. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 2 basis points to 2.977 percent.

Looking Ahead

Trading on Thursday may continue to be impacted by reaction to the Fed decision along with reports on weekly jobless claims, retail sales, and import and export prices.

The European Central Bank's monetary policy announcement is also likely to attract attention, as the ECB has indicated its meeting will be used to discuss ending its bond purchasing program.

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