2 Min Market Summary: 21 Mar 2019

Dollar sold off against its G7 counterparts after the Federal Reserve’s dot plot forecast revealed that 11 out of 15 US policy makers no longer believe that a rate hike is necessary this year.

The Fed left the target range for the fed funds rate unchanged at 2.25-2.50%; signalling that it does not expect any rate hikes now in 2019 versus two rate hikes at the time of the December 2018 meeting; and said it will begin tapering its balance sheet in May with an end date of Sept. 30.

Leaving the fed funds rate intact was widely expected. Projecting zero rate hikes in 2019 and only one in 2020, along with providing an end date for its balance sheet runoff was a surprise. These actions made it clear that the market doesn’t have to fear the Fed like it did in the fourth quarter.

U.S. Treasury yields and the U.S. Dollar Index (95.95, -0.43, -0.5%) dropped on the Fed’s dovishness. The 2-yr yield fell six basis points to 2.40%, and the 10-yr yield fell eight basis points to 2.54%. The curve-flattening trade weighed heavily on the financial sector, as a compression in spreads caused concerns that net interest margins will be weak for lenders.

In Brexit, markets were disappointed that UK Prime Minister May asked the European Union for only a short Brexit extension to June 30th. In her letter to European Council President Donald Tusk, she said she was not prepared to delay Brexit any further. In doing so, it is clear that she plans to bring the Withdrawal Agreement to a third vote but as the Speaker of the House and the EU has warned, major changes need to be made for it to be considered. She is jamming the twice rejected agreement down everyone’s throats and both Parliament and the EU are putting up a fight. Parliament is trying to arrest control of the Brexit process and according to France’s foreign minister, if May cannot offer guarantees that a Brexit deal will be passed, the extension request will be turned down. May will travel to Brussels for a summit of EU leader later today, where she is expected to discuss the extension with other member states.

The S&P 500 declined as much as 0.7% on Wednesday, as an earnings warning from FedEx (FDX 175.07, -6.34, -3.5%) helped fuel economic growth concerns. The benchmark index then advanced as much as 0.4% after the Federal Reserve provided a series of updates coming out of its FOMC meeting that created an impression it has shifted even further to a dovish mindset. The knee-jerk buying interest cooled off, though, leaving the S&P 500 down 0.29% for the day.

The S&P 500 financial sector (-2.1%) was the day’s outright laggard, dragged lower by a sharp drop in U.S. Treasury yields following the FOMC announcements. Conversely, the communication services (+1.2%) and energy (+0.9%) sectors outperformed. The energy space benefited from oil prices ($60.20/bbl, +$0.86, +1.4%) setting a new yearly high following some bullish inventory data.