In Anticipation of FOMC Action

A Tale of Two Markets this November


11/18 – Markets attempted a failed follow through move higher on the heels of Monday’s reversal yesterday, and as a result closed nearly unchanged. As background, on Friday the 13th, the NASDAQ pierced the 200 DMA on the close, but Monday’s rally enabled the NASDAQ to regain that all-important technical level. The S&P 500 closed below its 200 DMA on Thursday and has remained below that level since – despite a valiant effort yesterday. Yesterday’s attempt at a follow through rally was compromised by continued weakness in energy and commodities. The S&P 500 (-0.14%) slipped while the DOW (+0.03%) and NASDAQ (+0.03%) were flat on the day. Volume was nearly flat from Monday as well with the NYSE (+2.5%) and NASDAQ (+2.5%) both ticking higher. Yesterday, markets opened with a rush of buyers only to see them quietly exit the action by the closing bell. Over the previous two weeks, U.S. equity market have lost ground seven out of ten sessions.

From a sector standpoint, Materials (-0.60%) and Energy (-0.80%) were the leaders lower. A positive counter weight was provide by the Consumer Discretionary (+1.21) and Consumer Staples (+0.87%) sectors.

WTI crude fell to $40.74/Bbl and Brent crude fell to $43.66/Bbl – both recent lows and not far elevated above their respective 52-week lows as a result of ongoing concern over global growth, weak demand and over supply concerns. The $40.00/Bbl level is increasingly important from a psychological level for investors and increasingly that level looks suspect. Today’s EIA Petroleum Status Report at 10:30 AM EST may deliver some unwelcome volatility and some potential drag to the space if the weekly results speak to another surge in supply.

Yesterday’s economic data was mixed from the point of view of inflation and economic growth. The CPI reading for October was 0.2% – hitting consensus expectations. Minus food and energy – the CPI for the month was also 0.2%. Industrial Production on the other hand was modestly disappointing. Consensus was calling for a M/M reading of 0.1%. It came in at -0.2%. Capacity Utilization for the month hit consensus at 77.5%. The Housing Market Index also missed modestly. Consensus was calling for 64. The range was 62-65. It came in at 62.

Markets have been unofficially informed that the likelihood of a rate rise in December is high.

Another critically important data point for investors today will be the release of the latest FOMC Minutes.These Minutes will provide some insight into those policy discussions at the FOMC. Always interesting – particularly now as we get closer to the first move higher in rates in nine years.

11/19 – The release of October’s FOMC Minutes provided investors the confidence needed to re-engage equity markets yesterday – and re-engage they did. All three major U.S. equity market indices registered solid gains after nearly two weeks of indecisive price action. The NASDAQ gained 1.79% on the day while the S&P 500 (+1.61%) and Dow Industrials (+1.41%) followed suit. Volume was mixed, expanding on the NASDAQ (+7.46%) while contracting on the NYSE (-9.9%). The CBOE Interest Rate 10-Year yield rose 1 bps to close at 2.27% while the volatility Index (VIX) contracted sharply (-10.55%) to close at 16.85.
All major market sectors posted gains. Financials (+1.71%) led the market from a sector standpoint followed by Health Care (+1.62%) and Communications (+1.41%). The primary reason for the out performance by the Financials lies in the confirmation provided by the FOMC Minutes that the time for a rate rise has likely arrived. Investors are betting that December will be the month.

Also contained within the context of the FOMC Minutes were clear indications that the FOMC believes that the U.S. economy is expanding at a rate that can enable it to withstand a modest move in rates.

The data points most central to that narrative, inflation and job growth, are both in the best condition they have been in years. Additionally, if there is a bottom put in in energy prices, over the next quarter or two, a move in rates ahead of that anticipated event would be prudent. Chasing inflation has always proven to be a challenge for Central Bankers. The positive tone by FOMC officials also indicates that the Fed believes that despite slowing in China, the U.S. economy is sound enough to continue to expand.

Yesterday’s economic data was again mixed. Housing Starts (Level-SAAR) for the period came in at 1.060M versus expectations calling for 1.162M. The EIA Petroleum Status Report reflected a significant tightening in supply for the week with an inventory total of 0.3M barrels versus last week’s 4.2M barrel surge in supply. The Atlanta Fed’s Business Inflation Expectation Survey came in at 1.8% – hitting consensus expectations and confirming recent readings that have consistently been marginally close to the top line 2% target that has been established by the Fed.

Today’s Economic Calendar will be dominated by the 10:00 release of Leading Indicators. The composite data is released by The Conference Board and is highly susceptible to revisions. It reflects ten economic indicators that measure the level and health of economic activity. Consensus is calling for a reading of 0.5%. The range of consensus is 0.1% – 0.7%. Weekly Jobless Claims are expected to remain in channel and the Philadelphia Fed Business Outlook Survey will likely reflect flat business conditions.

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Photo: @DonkeyHotey