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Fed Decision Behind, Markets A Little Lower as Overseas Weakness Weighs

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March 17, 2016

(Thursday Pre-Market) A day after the Fed announced it’s keeping interest rates unchanged, a decision that was in line with expectations, stock prices moved slightly lower early Thursday. Though U.S. stocks had climbed late Wednesday to their highest levels of the year after the Fed’s statement, caution crept in overseas Thursday, weighing on the U.S. stock market.

The dollar fell against the euro and oil rose in the wake of the Fed announcement. The prospect of a dovish stance from the Fed typically puts pressure on the dollar, as lower interest rates tend to make a currency less attractive to investors. U.S. oil futures rose to their highest levels of the year early Thursday above $39, helped in part by the weaker dollar. And European stocks fell, in part due to concerns that a weaker dollar could hurt European exports, media reports said. The euro rose above $1.13 early Thursday, up near its high for the year.

Meanwhile, U.S. interest rates tumbled. The 10-year U.S. Treasury yield, which had been approaching 2% before the Fed’s decision, traded at around 1.87% early Thursday. Lower rate expectations put some pressure on financial stocks.

The Fed’s statement on Wednesday noted that U.S. economic activity has been growing at a “moderate pace despite the global economic and financial developments of recent months.” But the Fed also noted its sensitivity to what’s going on around the rest of the world by adding, “global economic and financial developments continue to pose risks.” The Fed also now targets two interest rate hikes this year, when it had previously projected four. Decision makers at the Fed are trying to balance two risks: raising rates too quickly, which could undermine the tepid economic recovery; or not raising rates fast enough to prevent inflation from taking off. 

The flip side of the Fed not raising rates, of course, is that the Fed is also signaling it doesn’t feel the economy is healthy enough for a rate hike. The market got a little overdone to the upside late Wednesday, and is now coming back slightly as investors digest the Fed’s words.

The monthly measure of leading economic indicators is scheduled for release Thursday, but it’s not anticipated to contain surprises.

S&P 500

FIGURE 1: SPX SCORES NEW TWO-MONTH HIGH AFTER FED.

The S&P 500 (SPX), plotted here through Wednesday on the TD Ameritrade thinkorswim® platform, rose to its highest close in more than two months after the Fed decision. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Volatility Eases After Fed: VIX futures, which track volatility, fell immediately after the Fed announcement, popped back up a bit, but then slid again to the lowest level since November, falling below 15, down from highs near 30 earlier this year. What does that tell us? The Fed meeting is now behind us and most key data numbers are in, and it seems the market doesn’t foresee any surprising numbers ahead that would be way outside of expectations. Quadruple witching, which is the expiration of futures and futures options on top of stock and index options, comes Friday, and typically we see some volatility ahead of that.

When Will The First Hike Come? Fed Chair Janet Yellen, in her remarks following the Fed’s decision, didn’t indicate when the Fed would next raise rates. That’s no surprise, because the Fed isn’t in the habit of predicting exact timings. As of now, Fed funds futures indicate the first 50% chance of a rate hike is likely in July.

FedEx Earnings A Bullish Signal: FedEx (FDX) reported fiscal third-quarter earnings and revenue on Wednesday that both easily beat analysts’ expectations. In a statement, the shipping company cited increased demand, and shares rose in after-hours trading. Strong performance from FedEx is a good indicator of the health of the consumer and of business. 

Good Trading, and all the luck of the Irish for St. Patrick's Day!
JJ
@TDAJJKinahan

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JJ Kinahan and Craig Laffman teamed up in a webcast Monday afternoon to discuss key market moves and the potential market impact from upcoming central bank meetings. 

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