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Fed Speak, Housing Data Dominate a Week That Keeps Rate Debate Alive

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September 21, 2015

Federal Reserve policy obsession has died down since last week’s interest rate meeting but hasn’t entirely disappeared. The “will they or won’t they?” tug and pull in the stock market will likely continue, especially in a week jammed with data on the very revealing housing market and a sprinkling of Fed speeches.

Commodities and currency trade continue to hold influence. Oil rises to start the week, recovering a sliver of Friday’s slide. The U.S. dollar is firmer as traders shrug off a dovish, if still uncertain, short-term Fed stance.

At least for last week, the stock market’s intraday volatility was much stronger than the week’s result would lead you to believe. The broad-based S&P 500 (SPX) only ended the week down 0.2% (figure 1). Still, higher levels of volatility could be here to stay. It’s possible that the CBOE Volatility Index (VIX), the broad market’s “fear gauge,” could continue to hover in a “new normal” range that’s much closer to historically familiar territory near 20 (figure 2).

Financial markets are already looking to the Fed’s upcoming October and December meetings and trying to handicap the odds for a rate hike (the first since 2006) then versus early in 2016. Federal Reserve policymaker James Bullard said over the weekend that he argued against holding rates steady last week because he believed the economy had recovered enough to begin raising rates, according to financial press covering his remarks. Bullard also reportedly described the meeting as "pressure packed," and said the decision to hold rates steady was "a close call." Let’s see if this week’s data—on housing especially, but also another GDP revision—make that call even tighter for Janet Yellen and crew.

In fact, Yellen is one of the decision makers that take the mike this week. She will speak after markets close on Thursday on the topic of “inflation dynamics and monetary policy.”

Europe’s broader stock markets are lower and could limit the good mood in U.S. markets. Europe is feeling the tug of Volkswagen’s steepest intraday decline in almost seven years after it admitted to cheating on U.S. air pollution tests for years. The car maker’s shares are down some 32% so far this year.

And the Greek drama remains alive and well. Greek voters have given the controversial left-wing Syriza party (the party of former Prime Minister Alexis Tsipras) a second chance after voting the group back into power in another high-stakes election. The election continues the country’s efforts to straighten out its books and keeps up pressure on the broader continent to handle the situation. 

SPX-lower-for-week

FIGURE 1: NEW RANGE?

? The S&P 500 (SPX) fell in a broad-market retreat late last week as the Fed’s inaction raised some concern about its view of global economic health. SPX did hold the closely watched 1950 line. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

FIGURE 2: VIX MOVES NARROWING.

The CBOE Volatility Index (VIX), the market’s “fear gauge,” continues to churn below 25 as the broader stock market has steadied. VIX is logging smaller intra-day moves in recent sessions. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

New-Home Demand Picks Up, Says Builder

One of the week’s few earnings reports has already hit. Lennar (LEN)—the second-largest U.S. homebuilder diversified across entry-level, plus planned communities, and financing—beat Street analyst expectations with its $0.96 per share in Q3 profit. That’s also up from $0.78 per share a year earlier.

Executives noted pent up new-home demand and stronger rental markets. LEN shares are up some 15% so far this year.

This week also includes data on existing home sales from the National Association of Realtors, expected to have slowed to a 5.45 million-unit clip from 5.59 million a month earlier. New home sales figures are also on tap; they’re thought by Street economists to have hit a 500,000 sales pace last month, just off the 507,000 in the prior month.

Nike: A Peak at China Effect?

Another earnings report could give investors a sense of consumer confidence, China’s economic stumble, and the strong dollar’s continued sting for multinational earnings—all important stock market drivers of late and likely to continue to drive trading. Nike (NKE), a Dow component, generates just over 40% of its sales in domestic markets, according to company data. But it depends on a not-so-insignificant 10% of its revenue in China. That’s Nike’s second largest single-country segment. Plus, China represented the biggest regional sales jump for Nike in fiscal 2015, an 18% rise to $3.07 billion, the company reported. Nike reports earnings on Thursday.

Good trading,
JJ
@TDAJJKinahan

FIGURE 3: ECONOMIC AGENDA.

This week’s U.S. economic report calendar. Source: Briefing.com.

NC
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