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Market Update

Want Any Mayo? Sandwich Week Between Jobs and Fed Puts Oil, Bonds In Focus

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December 5, 2016

(Monday Pre-Market) This coming week gets sandwiched between the jobs report and the following week’s Fed meeting. So the question is, what will investors focus on with a Fed rate hike almost certain, economic data sparse, and the presidential transition rolling on?

Well, bonds and oil both come to mind. So does the U.S. dollar. As stocks leveled off recently from their frenzied November pace, other markets stole some of the thunder. Oil, which reached six-week highs late last week after OPEC decided to cut crude production starting in January, could again find itself front and center as the new week begins. Energy stocks soared amid oil’s big run, but stronger oil prices also could raise concerns about possible inflation (see below).

On the other side of the equation, the dollar remains near recent 14-year highs amid optimism on what the new U.S. president might accomplish, while 10-year bond yields seemed to run into some technical resistance as they closed in on the 2.5% level. Friday’s gains in Treasuries, accompanied by slightly weaker equities over the last few sessions, could indicate some position shuffling after the big rally in stocks and sell-off in bonds over the last month since the election.

The Fed remains on the agenda as well, but perhaps not so much as it would normally at this time in the cycle. After all, futures prices signal rate hike odds of around 95%, so it’s pretty much baked in. The longer-term question is what happens next? Does the Fed sit back and watch for effects from the one hike, as it ended up doing last year, or does it enter into a more typical rate-hiking mode in which rates rise steadily over time?

That remains to be seen, but economic performance in the first few months under the new president, as well as overseas data, could factor into the Fed’s decision making. Some analysts say jobs growth would have to be stronger than it’s been recently to justify further near-term hikes, and indeed, the futures market doesn’t indicate much possibility of another rise in rates until next summer. And while there’s been some better data out of Europe and China recently, it’s not necessarily a trend. One thing that arguably kept the Fed’s finger off the trigger earlier this year was continued weakness abroad, even as the U.S. economy showed signs of strength.

Economic data in the week ahead is rather light. Factory orders on Tuesday morning could be worth watching to see if they indicate continued strong demand. Michigan sentiment and wholesale inventories are due next Friday. Additionally, keep listening for any comments from retail companies as to how the holiday shopping season is shaping up.

Maybe all this is worth discussing over coffee this weekend. Anyone going to Starbucks (SBUX) might be reminded that long-time CEO Howard Schultz announced last week he’s stepping down next April, but remaining executive chairman. SBUX shares fell about 3% on the news, but remain well above the $9 levels they were at back in 2008 when Schultz resumed the CEO position after an absence. Some analysts reminded investors that the last time Schultz left, SBUX shares crumbled. But Schultz is expected to remain a visible and active presence as the company, which plans to introduce a new premium coffee brand, build “emporium” stores in Manhattan, Shanghai, and other cities, and open more than 1,000 premium stores, The New York Times reported.

S&P 500

FIGURE 1: BONDS CLAW BACK.

The S&P 500 (SPX) and 10-year Treasury yields (purple line), plotted through midday Friday on the TD Ameritrade thinkorswim® platform, both began to show signs of leveling off from recent rallies, as some buying interest came back into Treasuries toward the end of the week. Resistance for the 10-year yield is at 2.5%.  Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Italian Symphony: Remember to watch for results of Italy’s referendum this Sunday, which asks voters to decide on constitutional reforms. Prime Minister Matteo Renzi has said he’ll step down if the referendum fails, and any sort of resulting political instability in Italy could have investors once again watching the health of struggling Italian banks. As some may recall, Italian bank troubles have weighed on the Eurozone economy and the euro in the not-so-distant past. However, the market impact of a failed referendum may be limited, Briefing.com said, because the European Central Bank seems ready to step up its purchases of Italian bonds. The euro was recently trading near one-year lows against the dollar at around $1.06.

Volatility Eases After Jobs Data: Ahead of Friday’s payrolls report, some economists had been saying only a really weak or strong jobs number could affect the Fed’s rate decision one way or the other, and volatility rose a bit as investors prepared for any possible surprises. But job growth of 178,000 was pretty much in line with the pace of previous months, not spiking up or down much. In a word, nothing in the report appears too likely to really ruffle anyone’s feathers, including, arguably, the Fed’s. Indeed, after the report, it seemed likely that the in-line jobs number might simply reinforce what a number of Fed officials have said recently about the economy being ready for higher rates. With the report out of the way, S&P 500 (SPX) volatility eased a little, with VIX falling back under $14.

Can High-Flying Oil Bring Down Airline Stocks? As the price of crude increases, those higher prices often have a way of echoing around the broader economy. Though booming oil futures often give the energy sector a boost, paying more for energy can be tough on transportation companies, especially airlines. That said, some of the key U.S. airline stocks are up over the last month, helped in part by thoughts that the broader economy could be improving, leading to greater demand for air travel. Another company that conceivably could be affected by higher oil is Tesla (TSLA), since its products offer an alternative to buying gasoline. However, TSLA shares have mostly chopped around over the last month even as oil surged.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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