The challenge for markets Thursday will be whether weekly jobless claims and existing homes sales confirm the Fed's view that the economy and housing are getting better.
The Fed Wednesday, as expected, signaled it saw improvement in the economy and added, for the first time a comment on "increased activity" in housing and that businesses are cutting back on staff at a "slower pace." It noted that ongoing job losses and sluggish income growth are still a concern.
- Fed Sees Economy Improving, Slows Buying of Mortgages
Economists expect jobless claims to come in at around the same level as last week, 550,000. They hope to see improvement in existing home sales to 5.35 million, when the data is released at 10 a.m.
Economists debate when the unemployment rate will peak in anytime form one to three quarters, but they have been hoping to see the number of weekly claims begin to trail off.
Stocks could take direction from that 8:30 a.m. claims number, after Wednesday's late day sell off. "You'll know before the open from the jobless claim. If they stay stubbornly above 550,00, then you've got a problem," said Art Cashin, director of floor operations at UBS.
The dollar is also a focal point, though there is little chance it will be mentioned publicly by leaders gathered at G-20 in Pittsburgh Thursday. A quick turn higher in the dollar, in fact, sapped the stock market's post-Fed rally and helped drive it to a lower close.
The Dow finished 81 points lower at 9748. After the Fed statement, it had reached 9917, its highest level since October, 2008. The S&P 500 was down 1 percent, or 10 points, at 1060, and the Nasdaq was off 0.7 percent at 2131. The market leaders were the defensive sectors of telecom and consumer staples. The biggest loser was energy, down 1.9 percent.
The dollar immediately slumped on the Fed release, then turned positive against the euro and a basket of currencies. "This risk rally is having trouble sustaining itself at new highs," said Brian Dolan of Forex.com. "We're kind of seeing the same thing with the dollar. The dollar just tried to sustain the highs at $1.4850 over the euro and it couldn't do that. These things are trading in lock step, so as the euro came off, the stock market followed suit."
The dollar finished at $1.4743 against the euro. The dollar has been hitting new lows as the stock market edges higher and commodities rise in a global "risk" trade. On Wednesday, oil was trading sharply lower after a surprising build in inventories was reported in the morning. Oil lost 3.9 percent to $68.97 per barrel, in its biggest daily decline since August 14.
Stock traders said they saw the stock market turn lower, not long after the Dow crossed the psychological level of 9900. "We've got to get over 10,000 (Dow), and we've got to close over 1070 to 1075 (S&P) for this thing to sustain itself," he said.
Dolan said the G-20 is unlikely to make note of the dollar, and the first official mention of the greenback might come when the G-7 finance ministers gather in October. "What's likely to come out of these guys is they are going to commit to maintain economic stimulus and accommodative monetary policies. They're not going to withdraw. They're not going to take the punch bowl away just yet," he said.
More on CNBC.com:
- Video: Obama's Big Week
- Video: G20 Summit in Focus
Treasuries turned higher after the Fed comment, in which it also said it extended its program to buy mortgage-backed securities until the end of March instead of ending in December. The Fed also intends to gradually reduce its purchases of a total $1.25 trillion in mortgage-backed securities. It said it would wind down its Treasury purchase program in October. The 10-year yield slipped to 3.420 percent, and the 2-year saw its yield slide to 0.968 percent.
Brian Edmonds, head of Treasury trading at Cantor Fitzgerald, said the Fed showed in its statement that it is preparing to step back from its "ultra-accommodative” stance. "I think the market was bracing for the worst," he said, adding there had been some concern the Fed would make some move toward tightening.
The Fed's 2:15 p.m. statement came not long after the auction of $40 billion in 5-year notes Wednesday. "Going into the 5-year (auction), the market traded very well. There were a lot of securities in dealers hands," said Edmonds. "I think you've got to take everything in perspective. We were just able to auction $40 billion in 5-year notes within 3 bps of the market. Our capital markets are still deep and well supplied."
"It wasn't the greatest auction you've ever seen but it shows you there is demand."
— Questions? Comments? firstname.lastname@example.org