Market Remains Under Pressure as Investors Digest Fed Minutes

As Wall Street continues to mull the latest minutes from the Federal Reserve, it seems that worries are continuing about higher interest rates potentially clipping the wings of a high-flying stock market.

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Key Takeaways

  • The latest housing market numbers were lower than expected.

  • Airlines have been doing well as demand, ticket prices are helping offset higher fuel costs.

  • The 10-year Treasury yield has risen back above 3.2%.

(Thursday Market Open) As Wall Street continues to mull the latest minutes from the Federal Reserve, it seems that worries are continuing about higher interest rates potentially clipping the wings of a high-flying stock market.

A bright spot amid rate hikes and climbing Treasury yields has been the financial sector as a backdrop of rising interest rates is arguably helping the banks because that means they can charge more interest on loans. But the sector also appears to also be getting some help from solid bank earnings. American Express (AXP) is scheduled to report earnings after the close today.

Outlook for Rising Interest Rates

The minutes showed that policy makers were thinking that additional gradual increases to the federal funds rate would most likely be needed if the current economic expansion, strong labor market, and inflation near 2% continue.

“This gradual approach would balance the risk of tightening monetary policy too quickly, which could lead to an abrupt slowing in the economy and inflation moving below the committee’s objective, against the risk of moving too slowly, which could engender inflation persistently above the objective and possibly contribute to a buildup of financial imbalances,” the minutes said.

This continued emphasis on gradual monetary policy tightening via raising the Fed funds rate comes at a time when rising Treasury yields, especially on the benchmark 10-year note, have helped pressure stocks in recent days. The 10-year yield is now back above 3.2%.

It appears that some investors might be worried that increased borrowing costs could dent investment in the stock market as well as the broader economy. And rising interest rates can help to make bonds look more attractive. 

Market Buoyancy

Still, despite the apparent pressure from a hawkish Fed, the market does appear to have some buoyancy. Even though the main three U.S. indices closed in the red yesterday, each had bounced from session lows. 

From a macroeconomic point of view, there’s arguably plenty to be optimistic about, with gross domestic product figures, as well as other economic data, coming in strong even as inflation appears to remain relatively contained.

And then there’s company earnings season, which has started off strongly. Through Wednesday, more than 88% of S&P companies reporting results had topped analysts’ expectations, according to CNBC, citing data from FactSet. Based on S&P Capital IQ consensus estimates, S&P 500 operating results are expected to show a 21.3% year-on-year increase, according to investment research firm CFRA.

And of course, there’s the bounce in U.S. equities since last week. Major indices remain lower than earlier in the month, but some participants may be thinking the market had gotten oversold and have been buying the dip. There’s also an argument to be made that the market might be setting a new range that revalues stocks a bit lower than they were earlier this year. That could be healthy, especially considering that company earnings growth could begin to slow in 2019 as effects of tax reform dissipate. 

FIGURE 1: Financials Finally Get A Boost: It’s been a tough year so far for the financial sector, but the last few days have brought a little support, as this one-month chart shows. Some of that support might stem from rising bond yields (purple line), while positive earnings news has also probably helped. Data Source: S&P Dow Jones Indices, CME Group.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Housing Data Disappointment: After midweek government data on the U.S. housing market disappointed, a question is whether housing data scheduled for release tomorrow might also come in weaker than expected. Data from the Commerce Department on Wednesday showed a rate of housing starts of 1.201 million units in September while building permits in the same month came in at 1.241 million units. Those seasonally adjusted annual numbers were both lower than the previous month and were weaker than a consensus of economists provided by Briefing.com. “The supply of new homes isn't picking up fast enough to meet the demand for new homes at more affordable price points,” Briefing.com said. “Accordingly, overall home sales activity will continue to be curtailed by affordability constraints.” Economists have said they expect existing home sales data for September, due out Friday, to show a month-on-month seasonally adjusted annual rate decline to 5.3 million units.

Flying High:It looks like rising fuel costs aren’t clipping the wings of airline companies. United Airlines’ parent company United Continental Holdings (UAL) said this week that it expects to offset around 90% of the fuel cost increase this year while competitor Delta Air Lines (DAL), which reported earnings last week, said it had recouped around 85% of higher fuel prices in 3Q. Higher oil prices can lead to increased costs for fuel, a key expense for airlines and other transportation companies. But it seems like a combination of higher fares and strong demand for flights are helping airlines shrug off rising fuel prices. American Airlines (AAL) is scheduled to report earnings next week, giving investors a full picture of how all three of the United States’ biggest airlines are faring with higher fuel costs. It could be interesting to see if AAL is also fending off higher fuel costs with higher ticket prices and rising demand.

Boo, Says Volatile October: Besides Halloween and all the horror flicks at the theaters, October can be a spooky month for investors because of increased volatility, and this month is living up to its historically scary nature. Since the beginning of this month, the S&P 500 has seen a 40% increase in average intra-day volatility over the first nine months of this year, notes CFRA. The Cboe Volatility Index (VIX), which is known as the market’s main fear gauge, has spiked to levels not seen in several months as investors have fretted about rising interest rates and continued international trade issues. “October’s reputation for being a volatile month is justified as it has tallied the greatest percentage of days in which the S&P 500 rose or fell by 1% or more since 1950 at 10.3%,” CFRA said. However, so far this month the rolling 12-month count of such daily price moves is just under half of its average since 2000 and is 22% lower than the average since 1950, the research firm said in its note Wednesday. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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