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Waiting for Yellen: What Might Fed Chair Say About Economy, Rate Policy?

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August 25, 2016

(Thursday Market Open) Today’s theme gets its name from an old movie. But instead of waiting for someone named Guffman, the market is waiting for Yellen.

That is, waiting for Fed Chair Janet Yellen, who’s scheduled to speak Friday at the Fed’s Jackson Hole conference. Other Fed speakers recently have sounded a somewhat hawkish theme, so the question going into Yellen’s speech is whether she’ll echo that sentiment.

Early Thursday, Kansas City Fed President Esther George said in a media interview that she feels it’s time to increase interest rates, though she added that tightening should be gradual, according to CNBC. Other Fed officials have made similar comments over the last week. It remains to be seen whether Yellen might come out with words so direct, but earlier this year, Yellen did directly address interest rate policy in one speech, saying in late May that interest rates should go up in the coming months (something that didn’t end up happening), so it could be interesting to see if she’s clear or more opaque tomorrow.

The market seems to be coming around to the idea that a rate hike may be more likely in coming months, with the futures market now predicting odds for a September rate increase at 24%, up from 18% a week ago. The odds for a December hike remain above 50%. The question is, based on some of the recent economic data being a bit more sluggish, including July retail sales and Wednesday’s existing home numbers, does the Fed think things are improving enough to justify a near-term move?

Need more proof it’s been a quiet market? The S&P 500 index (SPX) has now gone a month and a half without having a day in which it rose or fell 1% or more, a historically long stretch. Today is the 33rd session since the last 1% move, leading some to call this “the 1% market.” The last time the SPX moved more than 1% was on July 8, when it climbed 1.5% to close at 2129.9 amid the post-Brexit recovery. Seems like a long time ago.

On Wednesday, the market fell half a percent, which seemed to remind investors that indeed, things can go down, and that risk needs to be hedged. That may partly explain the nearly 9% jump in VIX futures, the so-called “fear index.” VIX is now trading at nearly 14, up from lows below 12 earlier in the month.

Some of the market’s weakness on Wednesday came from the health care sector, where Mylan (MYL) has had a tough week, coming under fire for raising the price of its EpiPen Auto-Injector, a medication and delivery system for people with severe allergies. MYL shares popped in pre-market trade Thursday after the company said it would expand existing programs for patients with higher out-of-pocket costs for the product, according to media reports.

Durable goods data for July, a closely-followed economic indicator, came out Thursday morning and the result was well above analyst estimates, rising 4.4%, the government said. Wall Street consenus had been for a 3.5% rise, according to Briefing.com. Durable goods is one of those things that helps measure consumer confidence, signalling whether people are willing to go out and spend on washers and dryers and other appliances. Apparently, they are, the numbers seem to indicate.

Oil prices slipped a bit in the early going Thursday, and when oil fell, so did SPX futures. The corellation is a lot lower between stocks and oil than it was earlier this year, but today crude may be having some effect on the broader market, particularly since there are few other catalysts.

S&P 500

FIGURE 1: RANGE-BOUND TRADING CONTINUES.

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim platform, fell moderately late in the day but remained within the long-term trading range it’s carved, with support down below at around 2155 and resistance at 2188. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Faint of Heart Need Not Apply: Anyone who gets a stomach ache on roller coasters probably shouldn’t be trading oil futures these days, as the market has done enough dips and soars to rival any ride at Coney Island. Earlier this week, futures dived on talk that producers wouldn’t forge an output freeze. Then late on Tuesday, the market leaped back on rumors that Iran was joining the talks and perhaps ready to agree on curbs. But early Wednesday, futures took another plunge on a surprise huge build in U.S. stockpiles reported by an industry group. U.S. government stockpiles data, released Wednesday morning, confirmed the supply build. Some things to keep in mind: Despite all the bobbing and weaving the last week or two, front-month U.S. oil futures seem pretty well ensconced in a long-term price range between $40 and $50 a barrel, and $50 could be a challenging mark to break from a technical perspective.

Techs Leading the Way: The Information Technology sector remains one of the leaders in the market’s long rally since spring, with S&P 500 Information Technology companies up 8% over the last three months compared with a 4.4% rise for the S&P 500 Index (SPX) as a whole. Some of the big-name stocks in the sector on a roll since late May include Alphabet (GOOG), up 8%, Apple (AAPL), up 8%, and Qualcomm (QCOM), up 13%. However, with many names in the sector near all-time highs, investors may find it best to remain wary about going “all-in.” As of Wednesday, the sector’s price-to-earnings (P/E) ratio was near 28. That’s nowhere near levels seen during the Internet stock boom of the late 1990s, but does make Information Technology one of the more pricey sectors at the moment. The cheapest sector from a P/E standpoint? The embattled Energy sector.

Yellen Speech Not Only Big Event Friday: Though the Jackson Hole speech Friday by Fed Chair Yellen dominates headlines, don’t forget to take a look Friday morning when the government releases its second estimate for Q2 gross domestic product (GDP). Recall that the government’s first estimate of 1.2% was well below Wall Street consensus and raised questions about the strength of the economy, as well what effect such weak growth might have on the Fed’s interest rate policy. Perhaps chastened by over-estimating last time, Wall Street analysts aren’t looking for anything in the way of improvement for the second GDP estimate, due at 8:30 a.m. ET Friday. Consensus is at 1.1%, according to Briefing.com. Anyone looking for strong GDP growth should check out the latest Q3 estimate from the Atlanta Fed, which has Q3 GDP growing at a robust 3.6%. If that turns out to be the case, it would be the best quarter-over-quarter growth since Q3 2014. Considering Yellen’s speech comes just a couple hours after the GDP data, it could be interesting to see if she makes any reference to the new number.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

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

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