S&P Hits 5-Year High Ahead of Fed Meeting

US stocks remained stable to higher, reaching a 5-year high as benchmark bond yields hit 2% - for the first time in 9 months. Fundamental drivers continue to support US equities, translating into US dollar strength against major currencies heading into afternoon trade.

Durable Goods Soar

According to US Commerce Department figures, orders for goods meant to last for three years or more soared in the month of December by 4.6% - gaining for the fourth straight month. The advance beats estimates of a 2% gain in orders, with core figures showing a subsequent addition of 1.3%. Core figures strip more volatile transportation equipment from the headline number.

The better than expected figure is estimated to shed optimistic light on the US economy when the world’s largest economy releases advanced Gross Domestic Product figures this week. Advanced estimates are anticipated to the show a 1.1% annualized pace of growth, positive but still slower than the 3.1% seen earlier.

Counters Housing Decline

The positive durable goods figure overshadows relatively negative reports from the National Association of Realtors. According to the trade group, pending home sales declined in the month of December, the first time since the end of the summer. Overall, the index of sales declined by 4.3%, as both Western and Northeastern parts of the US were hit hard by slowing sales. West Coast pending sales decreased by 8.2% while Northeastern interest declined by 5.4%.

Although widely negative, as pending homes account for 90% of the market, the figure seems to be digested as normal pullback from the recent string of gains for the report. The notion places increasing emphasis on next month’s figures.

What Will the Fed Do

Given that baseline economic fundamentals remain well supported, through retail sales and manufacturing, speculation is growing that Fed policymakers may hint at an early exit from recently implemented monetary stimulus as the notion of a rebound continues to surface. With the Fed balance sheet growing to $3 trillion in the last month, the potential scenario has become more of reality now. And, any innuendos of a retraction of stimulus would be particularly bullish for bond yields, which could translate into US dollar strength in the medium term.  

BondsSource:  Bloomberg
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