Remember way back to earlier this year when the slightest hint that the Federal Reserve was getting ready to raise interest rates for the first time since 2006 would send stocks stumbling? Then, late in the summer, global growth concerns sparked by China’s scramble for a fix there risked ripping control clean out of the Fed’s hands. Let’s just say stocks more than stumbled in response.
So now? Hints at interest rate hikes, like those offered in a Janet Yellen speech Thursday evening, ignited an overnight and early Friday rally in stocks and in the U.S. dollar. You heard that right: rate hikes equal stock rally. Street analysts say stock investors appear encouraged that the Fed has the reins again and that U.S. economic growth, while spotty, is returning to a clip that could allow the Fed to remove the emergency ultra-low interest rates only put in place to pull the U.S. out of recession.
Yellen told a crowd at the University of Massachusetts-Amherst that an initial rate hike is likely appropriate this year. The Fed, which passed on a rate hike a September meeting that was too close to call, meets again in October and December.
“Most [Federal Open Market Committee] participants, including myself, currently anticipate...an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen said. She expects inflation will return to the Fed’s targeted 2% clip as the temporary factors holding back prices fade. She said weak growth overseas shouldn’t prove enough to knock the Fed off its plans but stressed that the Fed is vigilant about conditions around the globe. Those remarks could indicate the Fed wants a little wiggle room should they have to course-correct again.
The tone of the speech likely improves the mood of earnings watchers who’ve been bracing for what could be a rough reporting period especially for firms exposed to a strong dollar.
As for the charts, the ability of the S&P 500 (SPX) to hold 1950 Friday could prove important to the fate of the broad average next week. A drop below that could leave SPX vulnerable to more selling.
GDP: Revised Up. The U.S. economy grew at an annual 3.9% pace in Q2, a bump up from the 3.7% reading reported earlier. The drivers? Higher consumer spending and somewhat stronger business investment. Consumer spending, a key component of this report, rose 3.6% vs. an earlier 3.1% estimate. Business investment in structures was revised up to 6.2% from a 3.1% increase. The reports main inflation reading rose at a 2.2% annual rate, unchanged from the prior reading.
Crude on Track for Weekly Gain. The Yellen effect spilled into crude futures markets. Oil rose overnight after Yellen calmed immediate concerns for global economic growth, and by default, demand for oil. U.S.-traded crude futures are back above $45 a barrel and so far are on track for a narrow weekly advance.
A Winner for Nike? Nike (NKE) gained early Friday after the athletic gear maker late Thursday said fiscal Q1 earnings rose to $1.18 billion, or $1.34 a share, from $962 million, or $1.09 a share, a year earlier. Revenue grew 5% to $8.41 billion. Worth noting: inventories rose 10% year-on-year to $4.4 billion. What does that possibly signal about demand?