Waiting Wednesday: Investors Appear in Wait-and-See Mode Ahead of Fed

Equity index futures were indicating a slightly higher open for all three of the main U.S. indices as market participants look toward what the fed funds futures market indicates will be the third interest rate hike of the year.

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Key Takeaways

  • The 10-year Treasury yield moved above 3.1% Tuesday.

  • Investors appeared disappointed after Nike reported earnings. 

  • A reading on consumer confidence showed an unexpected rise.

(Wednesday Market Open) Investors appear to be playing it cool ahead of an expected rate hike by the Federal Reserve later today.

Equity index futures were indicating a slightly higher open for all three of the main U.S. indices as market participants look toward what the fed funds futures market indicates will be the third interest rate hike of the year. 

The rate-hike expectations come as economic indicators have shown the U.S. economy is humming along strong enough that the Fed may feel it needs to raise rates to stave off problematic inflation. 

Stocks ended mixed on Tuesday, the first day of the Federal Reserve’s two-day monetary policy meeting. 

Volumes were on the light side for the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI), which both finished lower. Meanwhile, the tech heavy Nasdaq Composite (COMP) had heavier than average volume and finished slightly in the green.

Competition for Yield

The yield on the 10-year Treasury moved above 3.1%, so it’s perhaps unsurprising that so-called bond proxies didn’t fare that well Tuesday. Utilities was the biggest loser among the S&P 500 sectors, falling more than 1.2%. Consumer staples followed with a 0.73% drop, and real estate lost 0.1%. The communications services sector, which includes telecom companies—another sector that’s seen as competing for yield with bonds—gained just 0.09%.

During the decade of ultra-low rates, many investors searching for yield turned to certain stocks with a history of stable growth and dividends. Rising interest rates tend to make fixed income securities such as government bonds more attractive, which has the potential to lessen the appeal of stocks for such “yield seekers."

Perhaps a bit more of a head scratcher Tuesday was why the financial sector lagged as rates rose. Banks tend to do better when rates rise because that can help them charge more interest for loans relative to what they pay on deposits. But the sector fell 0.38%.

It’s possible that comments on trade from President Trump and U.S. Trade Representative Robert Lighthizerpressured stocks, as CNBC reported. It could also be that rates around these levels are already somewhat baked into the proverbial cake and the market doesn’t see the 10-year yield continuing to rise meaningfully above where it is now any time soon.

Nike’s Performance Appears To Disappoint

In corporate news Tuesday after the close, Nike (NKE) reported stronger-than-expected adjusted earnings per share of 67 cents on revenue of $9.95 billion. For the quarter, NKE was expected to report adjusted EPS of $0.62 on revenue of $9.93 billion, according to third-party consensus analyst estimates. In the same quarter last year, adjusted EPS came in at $0.57 on $9.07 billion in revenue. 

Despite the beat, and even though North American sales posted an increase for the second quarter in a row,the shoe and athletic wear maker’s shares fell in after hours trading. They were down about 2.4% this morning. Some investors may have been disappointed in the company’s gross margins. But it’s also worth keeping in mind that the stock had been trading at all-time highs heading into the report, so there could be some profit-taking involved.

FIGURE 1: CRUDE OIL VS. THE GREENBACK. Crude oil futures (/CL) crept toward July highs this week as the U.S. Dollar Index ($DXY) pulled back below 95. Investors may want to watch both, as the Fed eyes interest rate policy. Data sources: CME Group, ICE.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Fed Futures Forecast a Fourth:After the Federal Reserve’s rate announcement this afternoon, investors might want to consider watching what fed funds futures predict regarding a fourth rate hike this year. As of Tuesday afternoon they were showing more than a 77% probability of a rate hike in December, pending a widely expected hike this afternoon. Investors, analysts, and traders are likely to be parsing the language accompanying the rate announcement for clues it might give about future rate trajectory. If the Fed focuses on the strong economic activity that data from the United States are generally showing, that could argue the Fed is more inclined for a fourth hike. But trade issues could be a wild card, and if central bankers focus on that potential headwind for the economy, then that perhaps could mean policy makers see room for tempered hawkishness.

Consumers Are Confident:Speaking of the state of the economy, new data are showing that the American consumer is feeling pretty good about where things stand. That confidence could beget even stronger economic performance. On Tuesday, the Conference Board’s Consumer Confidence index in September unexpectedly rose. It hit 138.4, which isn’t far off the all-time high of 144.7 hit in 2000. The reading came in well above the 131.0 forecast by a consensus of economists provided by Briefing.com, which would have represented a month-over-month decline. “The key takeaway from the report is that the high level of consumer confidence, which was fueled by an uptick in expectations, creates a good backdrop for healthy consumer spending activity that is the driver of GDP growth,” according to Briefing.com.

Oil and the Dollar:Energy stocks had the second-best performance of the S&P 500 sectors Tuesday, edged out slightly by consumer discretionary stocks. Crude appeared to be buoyed by worries over global supply. Of course, investing in crude oil, and the companies that produce oil, means staying up to date on the latest geopolitical and economic issues that can affect supply and demand. But savvy investors should consider also paying attention to the U.S. dollar and where it might go (see chart above). As interest rates rise, that may also help the greenback by reducing inflationary pressures. It would seem that could create a longer term headwind for oil prices above and beyond the headlines that can make the oil market fairly volatile in day-to-day trading. Oil prices tend to be pressured by a higher dollar because that makes dollar-denominated oil more expensive for buyers using other currencies, potentially tempering demand. Consequences of lower oil prices could be mixed. While lower oil prices would probably weigh on crude producers, they could potentially give consumers a break and allow them to spend gas money on other things, which could be a boon for consumer discretionary stocks. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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