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Investors Appear to Tighten Reins Amid Uncertainty on Rates, Presidential Election

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September 8, 2016

(Thursday Market Open) It’s been tough to find a colorful way to describe this week’s market activity that’s been anything but exciting. But that may not be all bad: It may mean that investors are simply not in the mood to take on risk at a time when the Federal Reserve is sitting on the fence about maybe or maybe not lifting interest rates later this month.

And then there’s the presidential election, which appears to have some taking a step back until there’s more clarity on who might be leading the U.S. come January. That’s a trend that has popped up before, say, every four years.

Whatever it may be, it is what it is and this week’s market activity appears to be just trudging along and might continue to, barring, of course, any unforeseen event. In early trading, the three major benchmarks were turning slightly lower as traders appeared to absorb what was happening in Europe after the European Central Banks decided to keep interest rates unchanged.

Yesterday, the markets made tiny moves in both directions as investors appeared to again measure economic and government reports and statements that are likely to become fodder for the Federal Reserve’s September meeting on interest rates.

The Fed’s eight-times-a-year review of regional economic situations in its 12 districts—what’s referred to as the Beige Book because of its color—also appeared to play a role in the markets with its talk of “moderate growth.” That, coupled with the monthly Job Openings and Labor Turnover Survey, referred to as the Jolts report, tracked record unfilled positions. (See below.)

The Dow Jones Industrials (DJIA) and the S&P 500 (SPX) both dipped their toes into negative waters while the Nasdaq Composite (COMP6) floated above them again, touching another all-time close. The Dow subtracted a mere 12 points, or 0.1%, to finish at 18,526. The SPX barely budged, losing less than a point to 2,186.15 while the tech-heavy Nasdaq tacked on 8 points, or 0.2% to its fresh perch of 5,283.93.

Oil prices were under the spotlight Wednesday, rising in midsession and continuing to do so after the close. During the session, oil futures reached their highest point in nearly a week ahead of the weekly U.S. petroleum supplies report and as investors appeared to be hanging on to hope that there will be some sort of output-curb agreement later this month when the Organization of the Petroleum Exporting Countries meet. Futures prices of West Texas Intermediate (WTI) added $0.67, or 1.5%, to settle at $45.50 on the New York Mercantile Exchange.

It may have helped, too, that the Energy Information Administration raised its 2016 forecast to an average price of $41.92 a barrel from $41.16 a barrel projected earlier this year. The EIA also upped its 2016 estimate of U.S. oil production estimate to 8.77 million barrels a day, up by 0.4%, and up 2.5% for 2017 to 8.51 million barrels a day. The EIA will report its weekly stockpiles later this morning.

After the bell, oil futures climbed in electronic trading to $46.14 a barrel after the American Petroleum Institute reported in its weekly domestic-supply update that stockpiles had sunk by 12.1 million barrels, according to published reports. That was far more than the 425,000 expected because of disruptions caused by Hurricane Hermine in the Gulf of Mexico. In the early going, WTI futures were higher yet at $46.27.

Apple (AAPL) shares edged up a smidgen after its well-publicized, two-hour flagship product presentation of the iPhone 7, iPhone 7 Plus, Apple Watch Series 2, and a bevy of new bells and whistles for both. AAPL shares tacked on $0.66 to end at $108.36, 0.61% and were losing some that at the open after Wells Fargo downgraded the stock. 

S&P 500

FIGURE 1: FLAT AS A BOARD

The S&P 500 (SPX), plotted through Wednesday's close on the TD Ameritrade thinkorswim platform, lost just the tiniest piece of ground, down less than a point, or 0.01%. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Jobs Aplenty—Again. In what appears to be yet another sign of stability­—or is it confusion?—job openings in the U.S. were at record highs in July, according to the government’s Jobs Openings and Labor turnover Survey, known as Jolts, released Wednesday. It showed that the job openings surged to 5.9 million in July, yet hires stayed unchanged from the prior month at 5.2 million. That’s about 300,000 fewer hires than in February, according to the report.

Now square that against last week’s disappointing August job numbers of 151,000 added to payrolls, and something doesn’t seem to look right. Of course, Jolts looks at July’s numbers, not the August payroll additions, but still, what gives? Theories are abundant, with some market observers and analysts blaming the disconnect on a skills gap between what’s available and what many people are capable of doing. As the Labor Department pointed out last week, manufacturing job openings, for example, are at the highest level in 15 years because factory work has changed dramatically over the years. Will this divide take years—even generations—to fix itself, as some observers suggest?

Wait, Are There Wage Gains? Yes, apparently there were, according to the Fed’s Beige Book, but they weren’t exactly heaping raises. The Fed’s report of anecdotal evidence from its 12 districts on the state of their regional economies noted that “moderate” employment gains were leading to some, but not all and not huge, wage increases in some districts. Overall, the tone was “modest,” according to the Fed.

Conditions in the labor market remained tight in the Boston, Chicago, New York, San Francisco, St. Louis, and Minneapolis districts,” according to the Beige Book. “In Boston, contacts reported an unusually high number of job openings, and in the Richmond District turnover rates increased for entry-level positions.

“Wage growth ranged from flat to strong across the districts, but most reported that wage pressures remained fairly modest,” the book noted. “Contacts in Minneapolis reported moderate wage pressures, while contacts in St. Louis and San Francisco reported strong wage growth. On balance, wage pressures increased for highly skilled workers in many districts, and contacts in San Francisco reported continued strong wage growth for technology specialists.”

Here’s why this might matter: Fed Chair Janet Yellen has repeatedly said in recent speeches and testimony that the lack of wage growth is bothersome to her and among the reasons why the Fed has decided to keep interest rates in place. It’s not likely that “modest” wage gains will turn the tables, but the trends could down the line, some analysts believe.

Meanwhile, Rise in Rates Still on the Table. That’s what two Fed presidents said yesterday at and after a congressional hearing in Washington about the structure of the Fed.

"It looks like the case for a rate increase is going to be strong in September,” Richmond Fed President Jeffrey Lacker told reporters after the hearing, according to the Wall Street Journal. Lacker doesn’t get to vote on the decision, but he does get to voice his opinion.

At the hearing, Kansas City President Esther George, a long-time hawk and the only dissident vote at the last rate-hike meeting, repeated in the hearing what she said late last month: “I do think it’s time to move that rate.” She’s scheduled to speak again later today.

The CME’s FedWatch Tool futures probability for a rate increase in September moved up to 21% today from yesterday’s low 15%, and now sits over the 50-50 mark for a December hike, maybe reflecting that hawkish talk. Plus, Goldman Sachs has done a complete turnaround in its thoughts on whether rates will stay put later this month. In a note to clients, Goldman economists explained why they now think there’s a 55% chance of a rate move in September and an 80% risk of one at the December meeting.

The reason? The actual words spoken from the mouths of Fed members, especially Yellen, in Jackson Hole late last month. “The strength of the message surprised us,” they wrote, “but we don't think it came out of the blue. Back in the spring, the committee was ready to go in June or July, but then the weak May payroll report and the Brexit vote interfered. Now both of these worries have dissipated, the labor market has made further headway, financial conditions are easier than they were three months ago, and no major new risks have appeared.

“So we would probably need to see some hawkish Fedspeak between now and the start of the blackout period on Sept. 13 to keep the chance of a hike alive,” the report, issued ahead of Wednesday’s hearing, continued. “A signal that the August employment report showed sufficient employment growth to confirm the committee's baseline outlook might be enough to shift market expectations toward a hike at the September meeting.” So, there’s that.

Good Trading,

JJ

@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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