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Still Digesting: Market Looks Flat A Day After Fed, With Profit-Taking a Factor

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December 15, 2016

(Thursday Market Open) Sometimes the Fed does what everyone expects. Once in a while, it delivers a surprise. On Wednesday, the market got a bit of both.

Before Wednesday’s Fed meeting, investors had built in expectations for a December rate hike. What was unexpected was the Fed’s plan to raise rates three times in 2017, up from the previous prediction of two. Fed Chair Janet Yellen called Wednesday’s decision, “A vote of confidence in the economy,” adding that the economy has been “remarkably resilient.”

The Fed’s more aggressive stance regarding 2017 helped send stocks reeling late Wednesday, but Thursday’s open appears likely to be rather flat.

Much of the action early Thursday, instead, is in the dollar and gold. The dollar, already trading at 13-year highs, ripped higher against other major currencies after the Fed decision. The euro is now at $1.04, the lowest point of the year. U.S. Treasury yields also jumped, with yields on the 10-year note hitting new two-year highs. Meanwhile, gold hit a 10-month low. Some veteran chart watchers pegged the $1,140 an ounce area is a key support level for gold, but prices fell below that early Thursday, down another 3%. The next support may be near the year's low of around $1,050.

Wednesday saw the biggest one-session loss for the S&P 500 Index (SPX) in two months, but keep in mind that we’ve had so many up days over the last month that some profit taking was probably bound to come in ahead of the final two weeks of the year. Also notable is that after initially falling on the Fed’s statement, the stock market rallied back, only to slide steeply by the end of the day. That might be attributable to Friday’s quadruple witching, with Wednesday’s volatile moves giving some participants a chance to wind out of positions ahead of that.

Looking to next year, the futures market now points toward further rate hikes, but not immediately. The first month the chances of another quarter-point hike reach 50% or more is in June. There’s only a 6% chance of a hike in February and a 25% chance in March, according to Fed funds futures. So at least for the near term, rates might remain pretty stable. As for the Fed’s prediction of three hikes next year, it might be prudent to take that with a grain of salt, because the Fed hasn’t been so accurate about its predictions the last couple of years. But the Fed is giving the market the expectation of three, so that’s likely what we’ll trade on for now.

Some of the interest rate-sensitive sectors, like real estate and utilities, headed down more sharply than others after the Fed’s announcement. So did energy, which was hurt by a 3% drop in crude oil prices, which in turn were hurt in part by the stronger dollar that a rate hike helped bring about. Crude oil futures remained below $51 a barrel early Thursday.

Thursday morning brought some fresh economic data, with the government saying the consumer price index (CPI) rose 0.2% in November. That was right in line with Wall Street analysts’ consensus expectation for 0.2%. The CPI is up 1.7% over the last year.

S&P 500

FIGURE 1: SINGING THE RATE HIKE BLUES.

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim® platform, took its steepest one-day dive since mid-October after the Fed announced its rate hike decision. Meanwhile, volatility, represented by VIX (the purple line), rose back toward highs last seen early this month.Source: Standard & Poor’s, CBOE. For illustrative purposes only. Past performance does not guarantee future results.

Fed Still “Accommodative” Even With Hike: Fed policy remains “moderately accomodative,” Yellen said, with the current Fed funds rate remaining low and inflation still below the Fed’s objective. That could be read as meaning the Fed won’t take steps to tighten too much and risk choking off the growth we’ve seen over the last few months. The Fed doesn’t see extreme labor shortages that could propel inflation higher, and indeed, inflation remains below the Fed’s objective, Yellen said. The objective remains 2%, and Yellen emphasized the importance of not over- or under-shooting that mark. Yellen said that she expects it to rise to 2% in the next two years.

Home Economics: Friday brings the government’s November read on housing starts, and October could be a tough month to follow. As a reminder, housing starts surged 25.5% in October to a seasonally adjusted annual rate of 1.323 million, including a 10.7% increase for single-family starts and a 68.8% increase in multi-unit dwellings. The report seemed to indicate a pickup in housing demand, and if November follows with more strength, housing could help make a positive contribution to Q4 gross domestic product (GDP). However, projections for November look lower, with Wall Street analysts’ consensus at 1.225 million, according to Briefing.com. It might be interesting to get feedback from home-building executives on their earnings calls as to whether rising mortgage rates are starting to bite into demand.

Retail Sales, Industrial Production Both Disappoint: After a month of mostly positive U.S. economic data that helped contribute to both the stock market rally and to expectations for a Fed rate hike, how ironic that the day the Fed actually made its decision, two data points came in worse than expected. Retail sales for November rose just 0.1%, the government said Wednesday, below the 0.3% that Wall Street analysts had expected. November industrial production fell 0.4%, compared to pre-report consensus for a 0.1% decline. The thing to remember with these reports is that one data point doesn’t make a trend. Retail sales, a crucial indicator of consumer health, have risen seven of the last eight months, including big gains in both September and October. Weak automobile sales contributed to November’s lower reading.

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? Join JJ Kinahan, Craig Laffman, and Matt Sadowsky at 4:15 p.m. ET today for a discussion about the potential impact to the economy and your portfolio.

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