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Market Update

Fed Watch: Are Hawks and Doves Growing Further Apart?

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October 28, 2015

With the Fed clock ticking, the stock market is tilting higher, snapping two days of declines, after a flurry of mostly upbeat earnings news in the pharmaceutical and technology sectors, and improved oil prices.

Apple (AAPL) beat with its late-Tuesday results but today the Federal Reserve is the headliner. The central bank panel wraps a two-day interest rate session with a statement at 2 p.m. Eastern. The majority of Fed watchers expect no action from the panel, but market-driving news could still emerge, especially if the Fed lays some groundwork for its December meeting and potential early-2016 policy moves.

A lot could ride on a few words within that statement. That’s because Chair Janet Yellen isn't scheduled to hold a press conference following the meeting and officials aren’t due to release updated economic projections this time around. Economists are listening for any specific references to global headwinds, signs of flattening U.S. growth—especially in the job market and within inflation targets—and whether the known hawks are getting antsy or are feeling more sympathetic toward the doves.

The CME Group’s FedWatch Tool, calculated based on pricing in the Fed funds futures market, shows traders are pricing in about a 6% chance the Fed moves this week to raise rates for the first time since 2006. The tool shows about a 35% shot for a rate hike in December—up just slightly from the odds priced in earlier this week—and a 57% chance for a hike in March.

SPX-stock-chart

FIGURE 1: TINY RANGE.

The S&P 500 (SPX), charted on the new-look thinkorswim® platform, has been locked in a slim holding pattern to start a week marked by a crucial Fed meeting and more earnings news. Weaker oil stock trading helped drive energy shares and the broader SPX lower. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

AAPL: What China Slowdown? Wall Street had braced for potentially worrisome news from Apple (AAPL) about a rough patch for Chinese demand. It turns out, at least for Apple’s fiscal Q4, China was still buying iPhones. Earnings per share rose to $1.96 from $1.42 a year earlier, lifted in large part because of Apple's aggressive share-repurchase program. Revenue rose 22% to $51.50 billion from $42.12 billion in the same period a year earlier. Analysts polled by Thomson Reuters estimated that Apple would post earnings of $1.88 a share on revenue of $51.1 billion. CEO Tim Cook said he expects iPhone sales to grow again in the current quarter but some industry analysts have questioned whether Apple can meet or beat its year-earlier comparable, when Apple sold a record 74.46 million iPhones. Gross margin—the percentage of revenue that remains after manufacturing costs and one closely watched measure of profitability—was 39.9%, better than the company’s estimated 38.5%-39.5%. Remember, Nike (NKE), GM (GM), and Alibaba (BABA) all had results that defied Chinese demand concerns.

Twitter Warns on Revenue. Twitter (TWTR) was a late Tuesday decliner and was headed for Wednesday losses after it beat Street expectations with its latest earnings results but offered a revenue outlook below Street expectations. The social media firm said it expects Q4 revenue between $695 million to $710 million, below the previous Street consensus of $741 million. The company reported total monthly active users of 320 million, up 11% on a year-over-year basis.

Walgreens a Buyer Again. Deal buzz could lend underlying support to the broader stock market. Shares of the Walgreens Boots Alliance (WAG) gain early Wednesday in the wake of announced plans to buy Rite Aid (RAD) for about $9.4 billion. The tie-up with Rite Aid, uniting two of the three biggest U.S. drugstore owners could draw scrutiny from antitrust regulators. WAG also managed a slim profit in the latest quarter, helped by stronger-than-expected revenue growth.

Good Trading,

JJ

@TDAJJKinahan

economic-release-calendar

FIGURE 3: ECONOMIC AGENDA

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

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