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Equity Markets Under Pressure Ahead of Fed; Weak Oil, Data Weigh

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March 15, 2016

(Tuesday Pre-Market) With the Fed’s two-day meeting starting, weaker economic data coming in and oil prices sinking, stocks came under some early pressure Tuesday. While most economists don’t expect the Fed to make any interest rate moves this week, markets point toward increases later this year, and there’s some caution on the Street ahead of the Fed’s economic projections and policy statement Wednesday afternoon.

Oil prices helped push equities down early Tuesday, with U.S. crude sliding 2% to around $36.40. Growing supplies remain the focus. Gold, silver and copper prices also fell early Tuesday, with gold down 1% to nearly two-week lows.

The Fed meeting begins today, but the announcement won’t occur until Wednesday afternoon. The question is whether the Fed gives investors any hints as to future rate increases and their timing. In recent speeches, some Fed officials expressed positive sentiments about how the U.S. economy is performing, but also said they see signs of inflation “stirring.” Futures markets that track the probability of a Fed move point to a zero percent chance of an interest rate hike at this week’s meeting, but dial in an approximately 50% chance of a rate hike at the Fed’s June meeting and a 67% chance at the November meeting.

Retail sales and PPI both came out early Tuesday and could be factors in today’s trading on the Street. February retail sales fell 0.1%, compared with consensus for a 0.2% drop, while PPI fell 0.2%, in line with expectations. And January retail sales were revised downward, falling 0.4% compared with the 0.2% drop originally reported. These numbers, which come after the February employment report showed falling wages, point toward caution among consumers.

More data looms Wednesday morning, when CPI and housing starts are due before the open. Both PPI and CPI are important measures of inflation, and give the Fed more data points as it assesses the state of the economy. The most recent reading on core inflation (excluding food and energy) as measured by the personal consumption expenditures index, was 1.7%, near the Fed's 2 percent target.

Volatility looks muted to start the week, but often ticks up after Fed meetings and ahead of quadruple witching, which occurs Friday.

S&P 500

FIGURE 1: HOLDING ABOVE KEY SUPPORT.

The S&P 500 (SPX), plotted here through Monday on the TD Ameritrade thinkorswim® platform, finished slightly lower Monday, but remained above key technical support at 2000 for the second-consecutive close. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Bank of Japan Holds Steady: Earlier Tuesday, the Bank of Japan (BOJ) left rates unchanged, matching consensus expectations. However, Asian shares ended lower Tuesday because the BOJ downgraded its assessment of the economy, The Wall Street Journal reported. The BOJ said it will take additional easing steps if necessary. Interest rates are currently negative in Japan as the BOJ tries to stimulate the country’s sluggish economy.

Equities Just Below Even for Year: Even after Monday’s slight decline in the S&P 500 (SPX), stocks are down less than 1% for the year to date, recovering from the sell-off that began in January. Stocks have rallied nearly 10% in the last month, and much of that was driven by two sectors: Financial and energy. The energy sector in particular showed strength in recent weeks as crude oil prices soared more than 35% from 12-year lows posted earlier this year. The rise in crude also helped financial stocks, because many banks had loans out to the drilling industry and would have suffered had oil gone down to $20 a barrel, as some analysts predicted it might. All this isn’t to say the market is tearing the cover off the ball, but the year so far hasn’t been as disastrous as some might think.

Oil Falls and Stocks Don’t Follow: There was an interesting development Monday as equity indices finished mixed in spite of a more than 3% fall in U.S. oil futures. This comes even as oil’s correlation to the SPX sits at 89%, and in a market characterized recently by equities and oil moving in tandem. Oil had risen 8% last week, but cooled off Monday after Iran said it wouldn’t freeze production until it had doubled its current output to 4 million barrels a day, according to media reports. Another factor weighing on oil is growing inventories in the United States. Inventories of U.S. crude likely hit record highs for a fifth-straight week last week, rising 3.3 million barrels, according to a Reuters poll of analysts.

Good Trading,
JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC REPORT CALENDAR.

Source: Briefing.com

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JJ Kinahan

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

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