The reflation trade - strong commodities, weak dollar - was back in vogue Wednesday, even as a revised economic forecast from the Fed took the steam out of stocks.
In Thursday's market, traders are looking to jobless claims and the direction of the dollar to help set the early tone. Weekly claims are expected to come in at 625,000, down from last week's 637,000. Other economic reports of note are the Philadelphia Fed survey and leading indicators, both at 10 a.m.
From 'Fast Money':
GameStop , Hormel , Ross Stores and Suntech Power report earnings before the bell. Dow component Boeing holds a webcast at 12:15 p.m.
Traders expect volume to be light, as investors increasingly pull back ahead of the three-day Memorial Day weekend.
"Right now we're in a holding pattern," said Peter Costa of Empire Executions. "There's money moving into the market, but not in any big way ... I put my chips back in the bank, and I'm coming back Tuesday."
"There's no need to jump back in now," he said.
The dollar lost nearly a percent against the euro Wednesday, while the Reuters-Jefferies CRB index of 19 commodities rose 1.4 percent, hitting a level not seen since November. Coffee percolated to an eight month high, while oil surged 3.2 percent to $62.04, its highest settle since November 10.
The dollar was at $1.3768 against the euro, a decline of nearly 1 percent. It lost 1.4 percent against the yen.
Treasurys, meanwhile, found buyers in the afternoon after the Fed notched down its economic forecast, warning it sees the economy now shrinking between 1.3 to 2 percent this year. That is a bit worse than its earlier forecast of a contraction of 0.5 to 1.3 percent. It also now sees an unemployment rate of 10 percent, up from its previous forecast of 8.8 percent.
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The 10-year was yielding 3.204 percent at the end of the day, after its yield was higher much of the day. The Dow fell 52 points to 8422, after staging a triple-digit rally earlier in the day, before the 2 p.m. Fed announcement. The S&P 500 slumped 4.66 to 903.47, and Nasdaq fell 6 to 1727.
"I think the story really is one of faith, or hope, that the recovery lasts; that there's further gains in the stock market; further declines in libor, further declines in volatility. People feel besides poor housing starts, poor retail sales in the U.S. that we're past the worst," said Marc Chandler, senior currency strategist at Brown Brothers Harriman.
"This is not a flight out of U.S. assets, but the dollar can weaken. We've taken out some key levels here today," he said. The dollar saw its lowest 4 p.m. rate since Jan. 2.
Chandler said institutions are jumping into equities, all types of emerging markets trades and commodities for fear of missing out. "Many people in the market are being forced to get off the fence and chase the markets. People are being forced by prices and calendar to act in ways they may prefer not acting," he said.
"Quarter-to-date, we're up 14.5 percent on the S&Ps; Brazil is up 27.6 percent; the Hang Seng is up 28.7 percent," he said. Chandler said the dollar is now moving on momentum.
"The euro this year, even with today's gains, is up 0.69 percent. People have been chopped up with the currency going nowhere. My thinking is a lot of people have to chase the market because they're afraid the dollar express is leaving the station and they're not on it. Same with equities," he said.
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It's only fitting that oil bubbled to its highest price in months on the day that the Joint Economic Committee held a session on energy prices.
IHS CERA Chairman Daniel Yergin, a CNBC contributor, testified before the panel. He shared some of his thoughts on oil prices in an email.
"Oil prices are being driven by pent-up demand for "demand" -- that is, anticipation of economic recovery in China and other emerging markets -- especially a V-shaped recovery. Along with that, oil is, once again, an alternative to weakness of the dollar. There may be a lot of technical support, but this move is disconnected from fundamentals. April was the lowest oil demand in the United States since 1996. Spare production capacity around the world -- at 6.5 million barrels -- is higher than it has been since 1988. Inventories are closing in on the peak levels of 1998. World oil demand this year is down 2.2 million barrels per day. And rising prices are drawing out more near-term supply. None of that is recipe for rising prices. We'd say oil is way ahead of itself."