Benign FOMC statement fuels market in the afternoon, ahead of potentially unnerving State Union address

2010-01-27

The two focal points for today are the Federal Open Market Committee's (FOMC) statement and the State of the Union address.  Investors were expecting no fireworks from the FOMC statement and that is exactly what they got.  The Fed kept the fed funds target rate level unchanged at 0 - 0.25% and policy makers said that interest rates would stay low for an "extended period", consistent with the previous statement.  The statement recognized that the economy is strengthening and the deterioration in the labor market is abating, but areas of the economy remain weak.  After thawing the credit markets to a satisfactory level, the Fed will be removing most of its liquidity facilities by February 1. 

The market was in limbo throughout the day, slightly in the red because of weak readings in the Mortgage Bankers' Association purchase applications index (down 3.3% in the Jan 22 week over the prior week) and new homes sales of 342K (annualized, down 7.6% in December from November due to the first-time homebuyer incentives) vs. 370K expected (new home sales are approx. only 10% of the housing market, so they are usually not a key driver).  After the FOMC statement's release at 2:15 though, the market rallied, as the small risk of a potentially negative statement was taken off the table.  The Dow ended up 42 points (41 bps), the S&P500 was up 5 points (49 bps), and the Nasdaq outperformed by gaining 18 points (80 bps) after Apple's release of the iPad excited everyone.  Financials were the stronger sector, reversing earlier losses in advance of the president's State Union address.  Investors already expect the populist bank-bashing to go on, but the risk of Bernanke's confirmation seems to be much lower and the hope is that the president will focus more on how he will tackle job creation.  Financial stocks have been discounting a lot of regulatory headline risk and some short-covering probably took place.

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