Stocks Rise Ahead of Federal Reserve’s Interest Rate Decision – Wall Street Journal

Central-bank meetings dominated global markets on Wednesday, as the Bank of Japan
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introduced a new monetary-policy framework hours before the Federal Reserve’s September interest-rate decision.

Stocks gained, the yen swung and long-dated government bond yields rose immediately after the Japanese central bank affirmed its commitment to aggressive easing at the conclusion of its monetary-policy review.

The BOJ left its main interest rates unchanged, but introduced an interest-rate target for 10-year government bonds, committing to keep them around zero, and said it would continue with its asset-purchase program until inflation “exceeds” 2%.

The reaction in bond and currency markets, however, faded a few hours after the announcement. Yields on 10-year Japanese government bonds had initially climbed into positive territory for the first time since March, before falling back to trade at minus-0.023%.

The 10-year U.S. Treasury yield rose to 1.736% before retreating to 1.696%, according to Tradeweb, compared with 1.687% Tuesday. German 10-year yields returned to positive territory, trading recently at 0.001%. Yields move inversely to prices.

The yen swung against the dollar in the hours after the decision. The dollar rose sharply against the yen after the announcement to as high as ¥102.7850, but later reversed all gains to trade down 0.9% at ¥100.6620 as investors began to question the Bank of Japan’s ability to reach its inflation target.

A businessman walks past the Bank of Japan building in Tokyo on Wednesday.
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“When the dust settles, we think this will be seen as a disappointment,” said Adam Cole, currency strategist at RBC Capital Markets, noting the BOJ’s instruments ultimately remain little changed.

Stock markets largely rallied on the BOJ decision as bank shares climbed, further buoyed by a jump in oil prices.

The Dow Jones Industrial Average gained 0.5% to 18216 and the S&P 500 advanced 0.5% in early trading. The Nasdaq Composite added 0.4%.

The Stoxx Europe 600 rose 0.5% in intraday trade and Japan’s Nikkei Stock Average closed 1.9% higher.

The Federal Reserve concludes its September monetary-policy meeting later Wednesday. The central bank is scheduled to release its policy statement and updated summary of economic projections at 2 p.m. EDT, followed by a press conference with Chairwoman Janet Yellen at 2:30 p.m.

“All risk assets are unusually sensitive to central-bank actions right now,” said Niklas Nordenfelt, a portfolio manager at Wells Capital Management. “High valuations in the equity market are supported by central banks more than actual earnings,” he said.

Financial shares led stock markets higher amid relief the Bank of Japan didn’t cut interest rates further into negative territory. A steeper yield curve was also expected to boost lenders whose net interest margins depend on the difference between the short-term rates at which they borrow and the long-term rates at which they lend.

Japan’s TOPIX banks sector jumped around 7%, while shares of banks and insurance companies rose over 2% in Europe.

“The action by the Bank of Japan was to reduce volatility in the bond market, which should support the equity market and have a ripple effect around the globe,” said Brian Tomlinson, fixed-income portfolio manager at Allianz Global Investors.
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“I think they’ve come to realize they cannot effectively weaken the yen anymore, so they shifted their focus to supporting the banking and insurance sectors.”

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, was down 0.3%.

Currency analysts said it would likely take an unexpected rate rise in the U.S. to materially strengthen the dollar against the yen longer term.

Fed-fund futures, used by investors to bet on central-bank policy, suggest just a 15% chance of a rate rise on Wednesday, according to data from CME Group.
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While few expect the Fed to raise rates, any hints at an increase in December could call into question the calm and steady rise in risky assets over the second half of the summer.

“If nothing happens, it’s back to business as usual,” for markets, said Ameet Patel, analyst at Northern Trust
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Capital Markets. “But we think it’s an environment where everyone is hanging on essentially one data point,” leaving stocks fragile if the Fed’s tone is more hawkish than expected.

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Write to Riva Gold at riva.gold@wsj.com

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