Must-know: Market’s reception of the Fed’s July FOMC statement

Market Realist

Must know: Takeaways from the Fed's July FOMC meeting (Part 7 of 7)

(Continued from Part 6)

FOMC July statement

The U.S. Federal Reserve held its sixth Federal Open Market Committee (or FOMC) meeting of the year on July 29–30. At its conclusion, on Wednesday, July 30, the Fed released the press statement for the meeting. In this section, you’ll read about how markets reacted after the release of the July FOMC press statement.

Despite the near-term outlook for continued monetary accommodation and low interest rates (refer to Part 2 of this series), Treasury yields across the yield curve increased after the July FOMC statement was released. Seven and ten-year Treasury yields (IEF) increased the most on Wednesday, by ten basis points each to 2.24% and 2.57%, respectively. 30-year Treasury yields (TLT) increased by nine basis points to 3.31%.

However, the increase in yields was largely due to the better-than-expected growth in 2Q14 gross domestic product (or GDP), which also released on Wednesday. The advance estimate from the Bureau of Economic Analysis (or BEA) showed that GDP grew by 4% quarter-over-quarter (or QoQ) on a seasonally adjusted annual basis (or SAAR). The BEA also made upward revisions to the growth estimate for 2013 and 1Q14.

Treasury yields on the long-end of the curve, were down since the conclusion of the Fed’s last FOMC meeting on June 18. 30-year and ten-year Treasury yields had fallen by 12 bps and three basis points (or bps), respectively over the period June 18 to July 30. Geopolitical events in the Middle East—Iraq and Gaza—as well as the crash of the Malaysian airliner over war-torn Ukraine, had precipitated a flight to safer U.S. investment-grade bonds (AGG). The increased demand for safe-haven securities caused their prices to rise and yields to fall.

Stocks react to the July FOMC statement

Stock market reaction was muted after the FOMC statement was released. The S&P 500 Index (SPY) gained just 0.01% to 1970.07. Again, the stock market (IVV) reaction was influenced by a combination of factors. The release of the better-than-expected 2Q14 GDP numbers and the prospect for extended monetary accommodation, would normally be perceived as a bullish signal for share prices. Instead, markets were plagued by fears over Argentina’s sovereign debt default and signs of banking stress in Europe.

For more on bond market reactions to geopolitical, interest rate, and credit risks, please read the Market Realist series, Corporate debt reacts to FOMC minutes and Europe’s banking stress.

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