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U.S. stock rally fizzles as investors review Fed minutes

Trader Kevin Lodewick works on the floor of

Trader Kevin Lodewick works on the floor of the New York Stock Exchange, Tuesday, April 4, 2017. Credit: AP

A big rally in U.S. stocks evaporated Wednesday as the Federal Reserve appeared to struggle with questions related to inflation and government policy and suggested it might start trimming its balance sheet later in the year.

Stocks had jumped early on after payroll processor ADP said private U.S. businesses added 263,000 jobs in March, which was more than analysts expected. The Dow Jones industrial average rose as much as 198 points, and the Nasdaq composite reached an all-time intraday high. Industrial and energy companies made some of the largest gains.

But stocks started falling at 2 p.m. in New York City, when the Federal Reserve disclosed the minutes from its policy meeting last month. The minutes showed Fed officials discussing plans to reduce the Fed’s bond holdings later this year and disagreeing over whether it would be safe to let inflation rise faster and how to deal with the economic impact of President Donald Trump’s stimulus ideas.

ON WALL STREET: At the close, The Standard & Poor’s 500 index lost 7.21 points, or 0.3 percent, to 2,352.95. The Dow sank 41.09 points, or 0.2 percent, to 20,648.15. The Nasdaq fell 34.13 points, or 0.6 percent, to 5,864.48. The Russell 2000 index of small-company stocks lost 16.03 points, or 1.2 percent, to 1,352.14.

FED STRATEGY: The Federal Reserve bought trillions of dollars’ worth of bonds during the financial crisis of 2008-09 in an effort to stimulate the economy. When its bonds mature, it has continued to buy new ones. But now, the Fed may stop buying new bonds when older ones mature, which would gradually shrink the size of its holdings.

That sent bond prices surging and yields tumbling. The yield on the 10-year Treasury note fell to 2.33 percent from 2.36 percent. When bond yields fall, interest rates fall with them. That tends to hurt banks because it means reduced profits on lending, and banks took the largest losses Wednesday.

Banks made strong gains in early trading but they wound up with much bigger losses than the rest of the market.

For the last couple of months it seemed investors and the Fed understood each other well, as the central bank indicated it intended to keep raising interest rates gradually assuming the economy continued to grow at a steady clip. It raised rates in December and March. The uncertainty reflected in the Fed’s March meeting may challenge that understanding.

OIL PRICES: As markets closed, benchmark U.S. crude was down 18 cents at $50.85 a barrel in electronic trading on the New York Mercantile Exchange. In London on the Intercontinental Exchange Europe, Brent crude, used to price international oils, lost 1 cent to $54.07 a barrel.

JOBS SURVEY: U.S. private businesses added the most jobs in more than two years last month, a private survey found, a third straight month of robust gains. Payroll processor ADP said Wednesday that businesses added 263,000 jobs in March, the most since December 2014. That is up from 245,000 in February, which was revised lower. The ADP covers only private businesses and often diverges from official figures. In February, ADP said that employers added 298,000 jobs, much higher than the government’s figure of 238,000.

The U.S. government will release its own jobs report on Friday, and the strong ADP report suggests job growth may surpass the 178,000 jobs analysts expected.

However a report on service companies was a bit disappointing. In March they continued to do more business and hire more workers, but growth was slower than it had been in February and the results weren’t as strong as analysts hoped.

TRUMP AND CHINA: Trade agreements and regional tensions will be in focus as Trump and Xi meet Thursday and Friday at the president’s Mar-a-Lago resort in Florida. While some analysts expect the two sides to keep friction to a minimum by sticking to an agreed-upon script, others worry Trump’s past harsh criticism of China and mounting dissatisfaction with Beijing in American business circles auger ill for the summit.

ANALYST’S VIEW: “To some extent, the market’s imagination appears to be running wild with the possibilities of the outcome from this meeting, especially given the impulsiveness we have seen from President Donald Trump thus far on issues regarding China. This will likely cause many to stay on the sidelines ahead of the meeting,” Jingyi Pan of IG said in a commentary. She noted that apart from the diplomatic agenda, minutes of the Federal Reserve’s policy meeting and U.S. employment data are due out this week.

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