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Market Update

Hawks or Doves? After Rate Decision, Yellen and Fed’s Words Could Set Tone

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December 14, 2016

(Wednesday Market Open) The Fed is front and center, and with a rate hike pretty much a foregone conclusion, all eyes are on what Fed Chair Janet Yellen might say. The futures market indicates a 98% chance of the Fed raising rates today.

Once the Fed makes its decision, the question becomes how the market might react and whether Yellen projects a hawkish or dovish tone about the future. The Fed is likely to be very careful about how it words things, and this could be one of Yellen’s most important press conferences. See below for more thoughts on what to watch as the Fed holds court.

Fed aside, could today be the day the Dow Jones Industrial Average (DJIA) tops 20,000 for the first time? It’s certainly getting close, and it’s quite the contrast from early this year when the index was well below 16,000. But early on, pre-market trading indicated a flat to slightly lower open, and action could be somewhat slow in the hours leading up to the Fed’s early afternoon announcement.

The tech sector took a leadership role yesterday, and there’s a lot of optimism about today’s scheduled meeting between technology industry leaders and President-elect Trump. Some of the companies sending executives to Trump Tower include Apple (AAPL), Alphabet (GOOG), Facebook (FB), Microsoft (MSFT) and Amazon (AMZN). Trump’s tough talk about trade when he was on the campaign trail raised concerns about how his policies might affect the sector, but today’s meeting seems to be an olive branch.

On the negative side of the ledger today, China said it will penalize an unnamed U.S. automaker for monopolistic behavior, media outlets reported. The obvious candidates would seem to be General Motors (GM) or Ford (F). Keep an eye out for new developments on this front, because GM derives 48% of its revenue from China.

Retail sales for November rose 0.1%, the government said early Wednesday, compared with Wall Street analysts’ expectations for a 0.3% rise. Meanwhile, the November Producer Price Index (PPI) jumped 0.4%, a bigger gain than analysts had been expecting and the steepest increase in five months.

There’s a lot of nervousness about what might come out today from the Fed. Though stocks powered higher yesterday, VIX rose as market participants bought  protection. One big gainer was the the CBOE Nasdaq 100 volatility index (VXN), which rose 3.32% to 14.33. The VIX, for its part, was up 6% at one point Tuesday, and climbed back above 13 early Wednesday. Another volatility gainer yesterday was the Crude Oil ETF Volatility Index, OVX, which climbed 3.5% to 31.35, though this remains well below the mid-50s, where OVX sat just before the recent OPEC meeting.

Dow Jones Industrial Average

FIGURE 1: DJIA NEAR MILESTONE.

The Dow Jones Industrial Average (DJIA), plotted through Tuesday on the TD Ameritrade thinkorswim® platform,  closed less than 100 points from the 20,000 mark. This 20-year chart shows how far the index has come since 1996. It first moved above 10,000 in early 1999. Source: Dow Jones & Co. For illustrative purposes only. Past performance does not guarantee future results

Watch for Fed’s Assessment of Economy: Though the big headlines later today could emphasize the Fed’s rate decision, investors might want to pay close attention to certain elements of the press release as well. After November’s meeting, the Fed said in its release that it expected economic activity will expand “at a moderate pace” and “labor market conditions will strengthen somewhat further.” The Fed also said it expected inflation to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Watch closely for any updates to that key language in today’s press release to get a better sense of any changes the Fed sees in the economy. And definitely take note of any indication Yellen might give at her press conference about the possible future course of rate hikes. Attention now turns toward the Fed’s plans for 2017.

Yields Up From Lows Across the Atlantic: While U.S. Treasuries drew most of the recent attention, European bond yields have also been on the rise lately, though there’s debate as to whether last week’s announcement by the European Central Bank (ECB) amounted to an extension or a rollback of the current stimulus. The ECB said it would stretch its bond buying out to next December. At the same time, however, it plans to reduce the monthly amount of purchases by next spring. Some analysts saw this as a sign of the ECB winding down the program, and that helped lift German 10-year yields, which now trade at around 0.36%, compared with negative readings at mid-year. Still, ECB President Mario Draghi said the ECB’s decision doesn’t amount to a “tapering” of the stimulus program. Any sign of such a tapering could indicate economic optimism from the ECB.

DJIA Approaches Milestone: The Dow Jones Industrial Average (DJIA) is just a touch below 20,000, a level it’s never reached before. That raises the question of how the index has performed after taking out big numbers in the past. Well, in March 1999, when the DJIA first scored a close above 10,000, the index climbed to 11,000 by that May before tapering off for a few years and not topping 12,000 until 2006. And after hitting 15,000 for the first time in May 2013, the index climbed to well above 16,000 before the end of that year. Past performance, of course, can’t predict future returns, but perhaps it’s instructive to consider how the index performed around these milestones way back when.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

Fed Meeting/Market Update Webcast

How might markets respond to the Fed announcement this Wednesday? Join JJ Kinahan, Craig Laffman, and Matt Sadowsky at 4:15 p.m. ET this Thursday for a discussion about the potential impact to the economy and your portfolio.

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