Eye of the Storm?

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We very well could be in the eye of the storm. There is an election that has turned into a circus on both sides of the political spectrum, Russia is fully engaged in Syria while the U.S. sits by and waves its finger, earnings season has been mixed, the currency war is heating up as China and Europe cut rates and ad stimulus, and this week the Fed will meet and decide what to do with interest rates. I didn’t even mention the possible government shutdown. The storm could be nothing more than some strong gusts, but it has potential to be much more than that. So far the market has shrugged off any concerns and is myopically focusing on whether the Fed will continue with easy money (low rates) and even possibly ramp up stimulus.


Eye of the Storm

FOMC October

Let me get it out of the way first, the Fed is NOT going to raise rates and this October FOMC meeting is going to be a snoozer with more of the same rhetoric we have been hearing for months. The Fed starts their Federal Open Market Committee (FOMC) meeting this week and will release their FOMC statement. I don’t expect anything to change as they remain in standby and we continue to wonder and debate – from meeting to meeting. The FOMC statement will be released on Wednesday 2pm.


courtesy of wikipedia

However, there is one interesting piece of trivia I wish to share. We have heard Yellen (Chairman) suggest in her last press conference that the Fed will be raising rates this year (October or December meeting), however two governors have said it is a mistake to raise rates this year. If the Fed (Yellen) does raise rates (which I doubt) and any governor dissents (votes against), it will be the first time a governor has voted against the Chairman since 2005 and the current make-up of governors are of all the same class and ideology. It is important to note that all governors have been appointed by a single President, so any break from the Chairman would be highly unusual. There remain two open seats, and the President awaits Senate confirmation. There is something to be said for running a shallow bench, you don’t have many (if any) to oppose. Of course this is just interesting trivia, I still am a believer the Fed will NOT raise rates in October and very unlikely to raise them in December.


Earnings

It’s another big week for earnings and I can’t help but wonder if some of these big earnings will weigh in on the Fed. According to S&P, about 47% of the net top-line revenue in the S&P 500 index is derived from overseas. Earnings are very good glimpse of global trade, domestic sales, revenue, inflation/deflation, currency risk, the Fed is certainly paying attention.

Here is a list of some that Fed may be watching – so should we:

Monday:
Xerox and Cheesecake Factory

Tuesday:
Apple, Merck, Pfizer, Comcast, UPS, Ford, DuPont, Bristol-Myers Squibb, and Alibaba

Wednesday:
GlaxoSmithKline, Deutsche Bank, Fiat Chrysler, Mondelez, Marriott, Northrop Grumman, Valero Energy

These big names should give us an idea of both international and domestic revenue. Is the strong dollar playing a factor as recent earnings suggest, we have seen between 8-12% declines on sales and/or revenue that has been blamed on the strong dollar. With China cutting rates and Europe announcing more stimulus and possible negative interest rates, it will only push the dollar higher.

How much pressure is the Fed getting from business, lobbyist, Congress and others that the strong dollar is creating disinflation and possibly deflation. To raise rates will only further fuel the disinflation pressure that will hurt top-line sales and revenue, which means a weaker job market. I am sure the governors are getting an ear full.
Pay attention to these earnings as to how you think the Fed will interpret them. The main focus will be talk about the dollar, trade, and sales/revenue forecasts.


Economic Data

While we don’t have the big Labor Report, CPI/PPI/PCE, or GDP weighting down on the Fed decision, there still remains some last minute economic data that will certainly be considered.

Monday:
Purchasing Manager’s Index (PMI) – which is a domestic indicator of economic health in manufacturing. The index measures; new orders, inventory levels, production, supplier deliveries, and employment. PMI more than 50 means an expansion in the manufacturing sector compared to the previous month. A reading below 50 means a contraction in the manufacturing sector and a reading of 50 means no change.


courtesy of FRED

New Home Sales – the commerce department will release data at 10am ET. Economists forecast a slight decline of .4% from last month to a “seasonally adjusted” rate of 550,000. So far it has been a steady demand, not too strong and not too weak. If the number comes in weaker than expected, it would be another factor NOT to raise rates.


courtesy of FRED

Tuesday:
Durable Goods – is a measure of consumer products that do not need to be purchased frequently, because they are made to last a long time (3+ years). Examples are; appliances, autos, consumer electronics. They also tend to be larger ticket items. A measure of durable goods gives us an idea if consumers can or are willing to spend (take on debt) to make larger purchases. It is sometimes connected with home sales, as durable goods climb or fall with the rise and fall in the housing market. Every new home needs appliances.


courtesy of FRED

Consumer Confidence – while not really a scientific or data rich report, it does measure the degree of optimism a consumer feels about the economy and their personal financial situation. The idea is if they are more confident, they will spend/borrow more and if they don’t feel that confident they will save. Perception is everything and if the consumer’s moral is high, it means they will probably spend and that means more sales and revenue.


courtesy of FRED


Fed Decision:

The Fed will not be raising rates amid all these variables. Earnings will come with a note of caution, economic data will continue to show timid growth at best, and with the strong dollar factor and facing a possible government shut-down, the Fed will NOT take a risk of raising rates now.

The question is how do these earnings and economic data factors play on the market. On their own, they would most likely curb and slow down the rally. However, the market will interpret this data as to how it will impact Fed rate decisions.

We are and continue to live in a bad news is good news, when related to Fed’s easy money policies. In fact, the worse the news, the higher the probability they will not only keep rates low, but they may also begin to ramp up more stimulus, be it QE or something similar. Europe and Japan have ramped up their QE programs and that is certainly impacting the U.S., especially in trade and we are seeing that play out in top-line revenue of the S&P 500.

At some point we must come to terms that a great deal of the rise in asset prices and the apparent strength of the economy is coming from the Fed’s monetary policy, ZIRP, bond buying, and asset purchases.

When we believe it is going to end, assets fall, now assets are rising when the general perception is they will not raise rates.


Support & Resistance

INDU 17,400
We look like we had a blow-off top and covering rally on Thursday and Friday. Today will be interesting to determine if we have run out of steam or if we are going to see a push into the 17,800 area. Earnings and Fed perception will play a role. Look at 17,400 as short-term support on a pull back.

NDX 4650
The tech heavy index took off and we are flirting with the previous high. Apple this week will be a huge player in this index and the market. Some strong Apple earnings can push this index and the rest higher.

SPX 2080
The S&P 500 is slightly behind the strong push of both the Dow Jones and the NDX. I would look at 2080 and how trade around that level and if we can push through and hold above it.

RUT 1180
The broader based Russell Index did not see a strong break-out rally. It has been stuck below 1166 since the beginning of the month. However, with some strong earnings and optimism this index could rally and break the bearish trend since June. A strong move to 1180 and a close above it, would be the confirmation that the broad market is getting out of this rut. It has been testing that 1166 level over and over, eventually it will break and should rally. Apple’s earnings can inject optimism or concern – even in the general market.


Fed Rally

The market is already pricing in no rate hikes and a longer term easy money Fed policy. If the Fed confirms no rate hike this year in this week’s FOMC meeting and we get strong earnings from Apple, coupled with modest economic data – this market could rocket higher.

However, if the Fed continues to play the – “we are going to hike in the future” game, Apple’s earnings disappoint, and economic data is weak – this rally could be cut short and we could start seeing selling pressure.

It is all about perception and less about the math.

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