Fed Maintains Rates, Says The Economy Is Strong

Apple Can’t Push Up The Market

Apple (AAPL) is the largest company in America, which means it has the largest weighting in the Nasdaq and the S&P 500. It pulled the Nasdaq to a gain of 0.46%, but the S&P 500 still fell 0.1%. The Russell 2000 fell only 0.09% which implies, excluding AAPL, the small caps outperformed the large caps solidly. I’m not surprised by this modest weakness because the market had gotten overbought. The worst sectors were industrials and energy which were down 1.28% and 1.33%. Caterpillar (CAT) led the way on the decline as it fell 3.66%. Tech and real estate did the best as they were up 0.97% and 0.69%.

The Fed’s decision to keep rates stable had almost no impact on the stock market. The next Fed decision which could affect the stock market is when the Fed decides to finish its rate hikes this cycle. The higher the Fed hikes rates, the more likely each hike will weigh on the market.

10 Year Yield Rises Above 3%

I was wrong to suggest the 10 year yield wouldn’t hit 3% again this cycle as the yield increased 5 basis points on Wednesday to 3.01%. This movement didn’t have much to do with the Fed’s decision. It was caused by the positive economic data. There was so much data released on Wednesday, I will need further articles to get through it all. The 2 year yield, which is more likely to be affected by the Fed’s decision on interest rates, increased 1 basis point to 2.68%. This means the curve had another sharp steepening as the difference between the 10 year yield and the 2 year yield is now 33 basis points. I still stand by my expectation for the curve to invert in Q4 2018.

Another reason rates rose is because the Japanese 10 year bond yield is being allowed to increase, as the JCB slightly softened its dovish tone. As you can see from the chart below, the Japanese 10 year bond yield hit 12.4 basis points. If the JCB continues to allow the 10 year Japanese treasury yield to increase, the U.S. 10 year bond yield can surpass its 2018 high and possibly come close to 4%. This essentially means the JCB is bailing out the Fed by preventing the U.S. curve from inverting. Rising rates will hurt U.S. housing buyers, who are already in trouble because of a lack of affordability.

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Seth Golden 2 weeks ago Contributor's comment

Apple can't push up the markets huh? Just teasing, great article just a little irony given yesterday's headwinds vs. Apple's performance proving a tailwind.