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Stock Action in Limbo Ahead of Fed’s Tough Decision

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September 15, 2015

U.S. stock market action is essentially suspended, jiggling between narrow gains and losses, as participants await the Thursday decision by the Federal Reserve to raise interest rates for the first time since 2006. Or not?

Of course the markets are fully functioning. We’re talking about reluctance for big moves under the veil of uncertainty. Does a rate hike this week spoil the party and aggravate a bull market that showed some age in an August pullback? Does reluctance by the Fed spook a stock market that may feel there are more hidden cracks in the economy? Does the Fed let us all down easy? With so many questions, Monday’s stock trading volume was about 75% of last three month’s average daily volume.

Stocks aren’t the only space in limbo. The dollar traded lower against most major rivals early Tuesday. The greenback, trading at multi-year highs that sting U.S. multinational profits, remains underpinned by expectations for higher U.S. rates. But without clarity, even currency traders paused the dollar’s streak.

What is pretty clear is the impact that Asian markets continue to have on global stock trading. The Bank of Japan delivered as expected on Tuesday; it held key lending rates steady and warned about slowing demand from emerging markets. And the U.S. may be quiet, but stock volatility stirred anew in China. The Shanghai Composite lost 3.6%, its sharpest single-day decline in three weeks as the index clings to what some consider the psychologically significant 3,000 mark.

thinkorswim-spx

FIGURE 1: PRE-FED CHURN.

The S&P 500 (SPX), charted above, ended just in the red on Monday but has churned near 1950 over several recent sessions. SPX, and the blue-chip Dow Jones Industrial Average ($DJY), each trimmed about 0.4% Monday. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Follow Fed Funds Futures? Industry economists remain split over the likely outcome of these latest Fed deliberations. Another example of the shifting tide shows up in Fed funds futures trading. This market gives us a rough idea of how traders are positioning to play the Fed decision. As of this morning, Fed funds futures priced in a 25% chance for a rate hike Thursday. That compares to 40% likelihood for a September hike priced in a month ago. It’s important to remember that the Fed debate and all the noise it can bring to the market won’t likely fade with Thursday’s decision. There’s an October Fed meeting just around the corner. And one in December, too. As soon as the Fed pulls the trigger, the debate switches: One and done? Or first of many? Fed funds futures are priced for a 60% rate hike in December.

Ho-Hum Retail Sales. Retail sales is a key component to the economic portfolio under scrutiny at the Fed. In a Tuesday morning report, data showed that sales at U.S. retailers rose a modest 0.2% in August, about in line with Street expectations. Consumers spent less on gasoline (prices fell), but more on new cars and trucks. Sales were up 0.4% when gasoline was excluded.  Over the past 12 months retail sales have risen a rather pale 2.2%. The spending on big-ticket autos is encouraging to most, however.

Oracle Earnings. Fed hub-bub makes it hard to drill down on company news, but this week does feature a tech-sector earnings snapshot. Oracle (ORCL), whose stock is down 15% over the past three months, is due up with its fiscal Q1 results after market close on Wednesday. The tough transition to cloud computing remains a key headline. Wall Street expects earnings per share of $0.52, down from $0.62 in the year-earlier period. Oracle has missed consensus earnings per share expectations in five of the past six quarters, according to FactSet. Revenue remains a key metric across earnings reports. Forecasts are for $8.53 billion in Oracle’s quarterly revenue, off the $8.6 billion recorded in the same period a year earlier.

Good trading,
JJ
@TDAJJKinahan


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