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Will the Fed Hike Rates? Rosengren Makes Case; Markets Move Lower

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September 9, 2016

(Friday Market Open) The three major benchmarks were heading notably lower in the early going Friday after investors appeared to be spooked by North Korea’s confirmation that it had tested a miniaturized nuclear warhead Friday as protection against "threats and sanctions," according to published reports.

The Dow Jones Industrials (DJIA), the S&P 500 (SPX) and the Nasdaq Composite (COMP6) all moved lower again ahead of the open after Federal Reserve Bank of Boston President Eric Rosengren—a voting member—said that a “reasonable case can be made” for tightening interest rates to avoid an economic scorcher during a speech in Boston. (See below.)

Finally, something to move the markets—even if it doesn’t appear to be exactly bolstering them. Thursday saw stocks in all three major benchmarks moving to the downside after the European Central Bank held steady on key interest rates and may have proved frustrating to some investors with its apparent inaction. The ECB also did not, as expected, lay out extra steps that might have been a boost to Europe’s listless economy.

Ahead of the ECB’s moves, the markets stayed flat, but turned to the downside immediately after it became apparent that there was nothing more coming after the interest-rate hold.

“With the ECB’s inaction sparking fears that central banks have lost confidence in the benefits of further monetary easing, Wall Street could find itself vulnerable to steeper losses,” FXTM Research analyst Lukman Otunuga said in a note to clients.

The Nasdaq, which had been the star of the markets for four straight days, lost that illumination when it slumped by 24.44 points, or 0.5%, to 5,259.48. The Dow and SPX also moved, again, to the downside Thursday. The Dow gave back 46.23 points to 18,479.91, off 0.3%. Decliners led advancers with losses heaviest among two market heavyweights, Nike (NKE), off 2.69%, and Apple (AAPL), lower by 2.62% after investors appeared to rebuff Wednesday’s mega presentation of the iPhone 7. The SPX finished lower by 4.86 points, or a mere 0.2%, to 2,181.30.

And, for the second day in a row, oil prices grabbed attention after the Energy Information Administration reported the largest one-week drop in crude oil stockpiles since 1999. The EIA said yesterday that supplies plunged 14.5 million barrels, deeper than the 12.1 million barrels reported by the American Petroleum Institute the day before.

Remember that analysts were pegging a drop of more than the 425,000 barrels at the disruptive hands of Hurricane Hermine in the Gulf of Mexico. When all was said and done Thursday, futures prices of West Texas Intermediate (WTI) jumped 4.7% to close at $47.62 a barrel, up $2.12. That represented the highest dollar for dollar and percentage gain since April, and the highest finish in nearly three weeks, according to published reports.

In the early going, however, WTI futures were off roughly 1.5% but are still in line for a strong gain on the week, barring any earth-shattering circumstances. 


S&P 500

FIGURE 1:

The S&P 500 (SPX), plotted through Thursday's close on the TD Ameritrade thinkorswim platform, fell back just a tad to 2,181.3. In the last month, SPX has traded in a tight 10-point range with barely a handful of outliers. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Consumers Loading Up on Credit. A jump in nonrevolving loans outstanding—the bigger consumer credit used for the likes of student and car loans—helped lead to an unexpected surge in borrowing in July, the Federal Reserve said yesterday. In July, consumers held more than $17.7 billion in outstanding credit, well outpacing the $16.6 billion economists were projecting, and reversing course from the downshift originally reported in June. Yet, adding to that strength was a revision from June to a $14.5 billion from an initial report of $12.3 billion, the Fed said.

Nonrevolving credit jumped 6.7% on a seasonally adjusted basis, up by $14.9 billion in July compared with the 2.4% gain in June. Loans that are typically tied to credit cards and other short-term borrowing, or revolving loans, climbed by only $2.8 billion, in contrast, and are at a seasonally adjusted rise of just 3.4%. That’s more than two-thirds off of its 11.5% pace in June, the Fed said. Still, on a year-over-year basis, consumer credit remains strong. Is that a good thing? Considering that two-thirds of the economy’s gross domestic product is derived from consumer spending, it might be consumers only who are driving this so-far sluggish recovery.

Speaking of Auto Loans… Outstanding balances are hitting record levels, according to Experian’s Q2 look at the state of the automotive finance market. Auto loan balances for both new, used and leased cars moved over the $1 billion dollar mark for the first time in Q2, running up to $1.027 billion. Credit unions are experiencing the largest year-over-year growth in lending, according to Experian. Those gains are coming from across all risk levels except one, prime borrowers, which fell by fragments compared against the same period a year ago. The biggest year-over-year loan volumes were among those consumers considered deep-subprime borrowers, the report said, with an 11.86% increase. Next up were super-prime borrowers, who took out greater than 8.4% more in loans in Q2.

Where’s the Federal Reserve? This looks to be one of the last days Fed members will offer hints about what may or may not be ahead on the path of interest-rate changes. There are three Fed members on tap to speak publicly today and other Fed members early next week, ahead of the blackout period before the Sept. 20-21 meetings. Not all of them are able to vote but their opinions are heard.

Here’s today’s lineup:

* Boston Fed President Eric Rosengren has already spoken at the South Shore Chamber of Commerce in Boston. He’s a voter who made the case for raising rates amid worries keeping them too low rates will overheat the economy and shorten the economic recovery. Though he didn’t mention what his stance will be on for this month’s meeting, his comments appeared to answer the question of whether August’s disappointing jobs number would hold the Fed back from moving forward with an increase in interest rates. That answer appears to be “no” at this point. Remember that Rosengren has long spoken in dovish tones, so this hawkishness is new.

“If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” he said, according to the Wall Street Journal. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

* Fed Gov. Daniel Tarullo in an interview on CNBC. He, too, is a voter and one who primarily has taken a dovish stance on monetary policy.

* Dallas Fed President Rob Kaplan has two gigs today, including one this morning at the Mission Capital Conference in Austin, Tex., and a second tonight at the Dallas Security Traders Association Conference. He is not a voting member.

The CME’s FedWatch Tool futures edged up again today to a 24% probability of a September move higher, up from 18% yesterday and a midweek low of 15%. The probability of a December move to the upside got a little stronger today, at 55.9%, up from 51.4% yesterday.

Good Trading,

JJ

@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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