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Yellen's Go-Slow Approach Helps Rally Markets to Year's High

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March 30, 2016

(Wednesday Pre-Market) Federal Reserve Chairwoman Janet Yellen’s dovish statements pumped tons of energy into lifeless markets yesterday and appears to be doing so again early Wednesday after markets in China and Europe also got in on the party. Markets in Japan fell back on issues tied to the yen.

The Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) reversed earlier declines Tuesday to close at their highest points this year. In a speech laced with nine “gradual” references and 15 mentions of “risk,” Yellen assured Wall Street that any change in the Federal funds rates would come in small, measured doses.

The markets turned positive as investors cheered her explanations of what happened between December and March, when the Fed left rates untouched from its slight shift in December. The Fed outlook on the U.S. economy is largely the same.

“Global developments pose ongoing risks,” she said, referring particularly to economic woes in China and the collapse in oil prices. “Given the risks to the outlook…(it’s) appropriate for the committee to proceed cautiously in adjusting policy,” she said, adding, “that only gradual increases in the federal funds rate are likely to be warranted in coming years.” Still, she noted, “The U.S. economy is remarkably resilient.” She called the markets “an important ‘automatic stabilizer for the economy.”

Her go-slow approach was in sharp contrast to comments other Fed members have made in recent weeks about putting a rate hike on the table as soon as the next Fed statement on April 27. The CME Group’s FedWatch tool continued trending downward after the speech with most Wall Street participants seeing a 50-50 chance of rate hikes in November.

The SPX closed to the upside and finally in positive territory since the start of the year, up 15% from its February lows. All 10 sectors finished the session in the green. The Dow sits higher for the year. The Nasdaq was up ahead of the speech, thanks in part to strength in the technology sector, and stayed there. But it’s still in the red for 2016.

Gold snapped a three-day losing streak but was pulling back on Wednesday. Other commodities rose as well while the dollar fell. Oil prices fell too, but were rebounding Wednesday amid a smaller-than-expected rise in inventory, according to the American Petroleum Institute. More data by the U.S. Energy Information Administration is on the docket for today’s reports. The CBOE’s Volatility Index (VIX), what Wall Street considers its fear gauge, dipped and is on pace for its lowest close in a week.

S&P 500

FIGURE 1: S&P 500 RECOVERS.

The S&P 500 (SPX), plotted here through Tuesday on the TD Ameritrade thinkorswim® platform, snapped its losing streak after Fed Chair Janet Yellen said that interest rate hikes would be gradual. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Jobs Precursor. The private sector added 200,000 jobs in March, in line with prior expectations, according to payrolls processor ADP and Moody’s Analytics. February’s numbers were revised downward by 9,000 to 205,000. That’s a precursor to the more closely watched non-farm payrolls estimate coming out from the Labor Department on Friday.

Black Pants Win. Shares of Lululemon (LULU) were trending higher after the yoga-wear maker solidly beat Wall Street expectations and in spite of a soft outlook.  

More to Fill the Gas Tank. Have you noticed that prices at the pump are on the rise—and have been for 22 straight days? Prices topped $2 a gallon late last week and are up 30 cents a gallon for the month, according to AAA data. Prices rise every year around now as seasonal refinery maintenance results in production declines. It’s also when refineries begin the shift to the summer-blend. What’s more, we’re all taking more road trips. “Americans seem to have pent-up thirst for hitting the road, and with mild winter and spring break-taking pace, demand is quite strong,” Patrick DeHaan, senior petroleum analyst at GasBuddy.com told MarketWatch. “This summer now appears to likely rival or outpace record demand during [the] summer of 2007.”

Good Trading,
JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC REPORT CALENDAR.

Source: Briefing.com    

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