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Market Update

Stocks Higher Ahead of Fed Meeting, Market Wants Vote of Confidence

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December 16, 2015

Is today the day? The first U.S. interest rate hike in nearly a decade?

We’ve been talking about this Federal Reserve meeting outcome for months. It feels like years. The Fed—carrying a bias tilted toward higher, or “normal,” rates while much of the rest of industrialized world maintains easy monetary policy—will wrap up a two-day session with a highly anticipated decision at 2 p.m. Eastern and stocks are generally higher early Wednesday in anticipation of a gentle course of action at the Fed.

At last check, short-term Fed funds futures market traders have priced in a potential 81% chance that the Fed activates the first interest rate hike since 2006 at this meeting, according to pricing calculations provided on the CME Group’s FedWatch Tool.

Not all market participants are convinced that the Fed is ready to move. A December survey conducted by True North Market Insights for TD Ameritrade found that 36% of the 1033 queried men and women investors think the Fed will raise rates today. Clearly less than half.

Buzz on Wall Street hints that Fed inaction could really do a number on sentiment. No rate move now could potentially lead some traders to wonder what the Fed knows about a wobbly economy that the rest of us do not.

Quiet trading is possible heading into the afternoon announcement, likely followed by a spike in high-volume and high-volatility trading, and then a shift to “What’s next?” The Fed does convene again in January. The late week includes the potential added volatility of “quadruple witching”—the expiration of futures and futures options on top of stock and index options.

There’s little occupying Wall Street’s mind outside of the Fed. The only thing coming close? Walt Disney (DIS) gains early as largely upbeat reviews roll in for the latest in the “Star Wars” franchise.

SPX stock index

FIGURE 1: PRE-FED OPTIMISM?

The S&P 500 (SPX), plotted here on the thinkorswim® platform, has climbed midweek in wide-range sessions, including a more than 1% gain on Tuesday. SPX last week hit its lowest since the middle of October. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Housing Starts Jump. Does this report give the Fed some cover to raise rates? Housing starts rose 10.5% in November to a seasonally adjusted annual rate of 1.173 million, government data showed. That’s more than Wall Street’s guess for a 1.14 million rate. Single-family starts rose 7.6%. Housing permits jumped 11% to a pace of 1.289 million, the highest in five months.

Crude Reality? Crude oil prices gave up earlier gains on Wednesday. This market, too, is fixed on the Fed decision. A Fed rate hike would presumably buoy the greenback and make crude imports more expensive for buyers paying with foreign currencies. New York-traded crude was near $36.74 a barrel in early action. London-traded Brent changed hands near $37.53 a barrel. Supply continues to be a driver for this market. According to the API estimate, U.S. crude stockpiles likely grew by 2.3 million barrels for the week ended Dec. 11. The official data by the Energy Information Administration will be issued later Wednesday.

First Solar Boost. Back on earth, there is more going on in Washington than just the Fed. It’s hard to remember that, I know. First Solar (FSLR) shares jumped in pre-market action, with traders giving some credit to Congressional action lifting a ban on oil exports and at the same time extending solar and wind tax credits.

Good Trading,

JJ

@TDAJJKinahan

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