The Dow Jones followed up yesterday’s three-digit gain with another advance of the same magnitude, climbing 166 points or 1.12% with an hour of trading left in New York. The S&P 500 rose 1.11% to 1605, while the NASDAQ 100 advanced 1.03% to 2896.
The impetus for the rally came from the low final reading for first-quarter GDP, which served to allay concerns that the Fed may reduce its stimulus sometime this year.
First-quarter GDP growth was slashed to an annualised rate of 1.8% by the Commerce Department, which suggests the US economy has been in a far more fragile state than we had previously thought. Surveys ahead of the data showed the consensus of expectation was for the previous estimate of 2.4% to be left unrevised.
The Fed has said several times that the decision to taper would be data dependent, and if that is true, this latest piece of data could herald an extended period of stimulus.
Inevitably stimulus will eventually need to be removed though, and it does raise the question of just how the Fed is going to be able to pull it off without unduly ruffling the feathers of the financial markets.
Mortgage rates are still rising, suggesting further assurance from the Fed is still required about how long the Fed funds rate will be kept close to zero. Data from the Mortgage Bankers’ Association earlier today showed a 5% weekly drop in its refinancing index, suggesting the higher rates are hurting demand there and there is a risk that the housing market could be constrained if things continue this way.
In light of the latest twist in the stimulus story, tomorrow’s jobless claims data looks even more important. Initial claims are expected to come in at 345, 000, which would be a slight improvement from the week before.