House and Senate negotiators reached a bipartisan budget agreement late Tuesday designed to break the gridlock that led to the government shutdown in October, and stabilize Congress’s fiscal policy-making over the next two years. The deal, which adopts deficit-reduction measures over a decade to offset more spending on domestic and defense programs in the near term, goes to the House and Senate for approval in the coming days.
Since political dysfunction was seen as an impediment to growth, some analysts feel the budget deal, coupled with recent upbeat labor market data, gives the Federal Reserve more reason to start paring back its $85-billion-a-month bond-purchase program as early as next week. The Fed’s next policy-setting meeting concludes on Dec. 18.
The market has fluctuated over the last couple weeks, as investors have shifted from fearing that Fed action would removing an underlying support for stocks to acceptance that the economy is improving enough to stand on its own.
“After the shenanigans in Washington over the past year, people are just over it, and that’s why there’s a muted reaction” to the budget deal, said Adam Sarhan, chief executive officer of Sarhan Capital. “The primary focus is the Fed, and investors aren’t eager to take aggressive positions ahead of next week’s Fed meeting.”
Investors have been reluctant to take on new risk so close to the end of a very good year, Mr. Sarhan said. Outside of some selective buying, he said, most of his year-end positioning has been done.
The S&P 500, up 26% year to date, is headed for the best annual performance in a decade.
The economic calendar was nearly bare, with just the federal budget for November, due out at 2 p.m. EST, expected to show a deficit of $142 billion. Earlier Wednesday, the Mortgage Bankers Association said mortgage applications increased 1% on a seasonally adjusted basis in the latest week. There were slight gains in both purchase applications and refinancing activity.
The yield on the 10-year Treasury note ticked up to 2.820% from 2.797% late Tuesday.
Front-month January oil futures slipped 0.1% to $98.42 a barrel, after settling at a six-week high on Tuesday. December gold futures eased 0.6% to $1,255.40 an ounce, pulling back after Tuesday’s 2.2% surge. The dollar lost some ground against both the euro and the yen.
European markets edged higher, bouncing from the previous session’s broad losses, as investors weighed the U.S. budget deal. The Stoxx Europe 600 tacked on 0.4% after sliding 0.7% on Tuesday.
Germany’s DAX 30 index gained 0.4%, after data showing consumer prices increased as expected in November. France’s CAC 40 rose 0.9% and the U.K.’s FTSE added 0.4%.
In Asia, China’s Shanghai Composite slid 1.5% as a move to liberalize interest rates raised concern over pressure on bank profits. Japan’s Nikkei Stock Average lost 0.6%.
In corporate news, MasterCard rallied 4.1% in premarket trading after the credit-card company said late Tuesday it was boosting its quarterly dividend by 83%, authorizing a new $3.5 billion stock-repurchase program and implementing a 10-for-1 stock split.
Dow component Home Depot was little changed after it provided cautious fiscal 2014 financial targets, with earnings-per-share growth of 17%, which is just shy of analyst forecasts, and sales growth of 5%.