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Fed’s Yellen’s Inflation Stance May Hold Market’s Short-Term Fate

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September 24, 2015

Stock indications point lower Thursday, setting up what could be a third straight drop for a nervous Wall Street looking ahead to an early evening speech on inflation and interest rate policy from Federal Reserve chief Janet Yellen.

Global markets offered little support for the U.S. trading day. Chinese economic fortunes continue to color global stock trading. European shares swung between gains and losses as a car emissions scandal continues to play out for the powerful auto sector.

Stock indexes logged back-to-back drops on Wednesday after a rally for oil dried up later in the day and sent crude futures prices to their lowest in a week. In fact, lower crude prices pushed Norway’s central bank to cut its key interest rate to 0.75% from 1%. In response, the U.S. dollar rallied sharply against the krone and other currencies as the gap in interest rate direction (a bias toward higher rates in the U.S., that is) continues to force a divide in currency levels.

Some earnings reports due out today could continue to reveal the full impact of a stronger dollar’s sting on global profits. Due up: KB Home (KBH) reports this morning, while Nike (NKE)—whose stock performance can hinge on how well its goods sold internationally—is due to report results after the closing bell. Bed Bath and Beyond (BBBY) and Jabil Circuit (JBL) are due to release results this evening as well.

But Yellen is the marquee event. She could shed light on how soon the U.S. bias toward higher rates becomes reality when she offers a speech in Massachusetts at 5 p.m. Eastern today. Even traders who don’t regularly check the S&P 500 (SPX) futures in after hours action might want to give them some time tonight; they’ll be our first reading on the reaction to the speech. Yellen’s topic is inflation dynamics and monetary policy, but it’s not clear if she’ll be talking theoretically or will entertain follow-up commentary on the mid-month decision to pass on the first rate hike since 2006. In that statement, the Fed left the door open a crack for a rate hike yet this year, according to most industry analysis of Fed commentary. Will Yellen confirm or debunk this view?

Traders could also be sensitive to inflation commentary, especially Yellen’s stance on inflation versus deflation risk given the recent round of global economic setbacks as well as weaker commodities prices.

S&P-500-drops

FIGURE 1: BREAKOUT COMING?

The S&P 500 (SPX) fell in back-to-back sessions Wednesday but remains near the 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.

Germany Still Feeling Good? German business morale unexpectedly improved in September despite a weakening growth outlook for China and other parts of the developing economies. Ifo's business climate index rose to 108.5 from an upwardly revised 108.4 in August. The reading was the strongest since May.

Durable Goods a Mixed Bag. Orders for durable U.S. goods fell a seasonally adjusted 2% in August, tugged down by lower bookings for autos and airplanes and largely in line with what Wall Street had braced for. But the report overall wasn’t stellar. Orders minus transportation were flat, the Commerce Department said. Orders for core capital goods—a proxy for business investment— slipped 0.2%. Shipments of core capital goods—which is used to help crunch quarterly GDP—fell 0.2% in August .

Jobless Claims Rise But on Trend. New applications for U.S. unemployment benefits edged up by 3,000 to 267,000 in the seven days ended Sept. 19. Despite the rise, the latest tally on initial claims fits with a healthy labor market, most industry economists agree. The report comes a week before the scheduled release of September employment data, due out on October 2. But there’s some rising concern that a Congressional dispute over Planned Parenthood spending could temporarily shut down government operations and risk delaying that report’s release. Stay tuned.

Good trading,
JJ
@TDAJJKinahan

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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