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Fed in Spotlight As Meeting Starts, But Stay Tuned for AAPL Earnings Later

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January 31, 2017

(Tuesday Market Open) On a day when the Fed’s latest meeting begins, focus may end up being several thousand miles further west.

The Fed meeting starts today, though there’s a strong sense that no rate hike is likely. That could put the spotlight on Apple (AAPL) earnings, which come out after the close. There’s also continued attention on policy in Washington, D.C., where the new administration keeps generating news.

As of this morning, Fed funds futures predicted a very slim chance of a hike at this meeting. Still, the market often tends to slow down and trade in a range during Fed meetings, so we’ll see if that’s the case today. Investors may want to carefully examine the Fed’s post-meeting statement for its outlook on economic growth and inflation.

There’s a lot of focus on Washington policy right now, which seems to be sparking nerves on Wall Street. But it’s important to keep things in perspective. The market remains near all-time highs, and had an amazing run since the election. It seems prudent for investors to shut out the noise and stick with good companies they know.

One company many investors know well is Apple (AAPL), which continues to be among the most popular names with retail traders. AAPL stock surged over the last eight months from below $90 in May to the current $121, but there’s some concern brewing about what the next big product might be. It’s also unclear exactly how AAPL plans to deal with both the strong dollar and changing U.S. trade policies.

AAPL reports Q4 results after the close today, and, iPhone sales tend to be closely watched. The Q4 consensus earnings estimate from third-party Wall Street analysts is $3.22 a share, down from $3.28 per share in the year-ago period, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. Revenue is projected to climb to $76.92 billion from $75.87 billion a year ago.

We’re about halfway through the current earnings season, and this morning delivered a host of results from major companies including Eli Lilly (LLY), Exxon Mobil (XOM), Pfizer (PFE). Investors are still digesting the data and listening to conference calls at this point.

Under Armour (UA) had a tough morning. Shares fell more than 20% in pre-market trading in reaction to the company’s Q4 earnings and forward guidance. Earnings per share missed Wall Street analysts’ consensus estimate, and revenue growth was the lowest in a number of years. In its press release, the company said, “Numerous challenges and disruptions in North American retail tempered our fourth quarter results.”

Something to ponder: United Parcel Service (UPS) fell sharply in pre-market trading after missing Wall Street’s top- and bottom-line estimates with Q4 earnings. UPS is often seen as a barometer of the broader economy, so its earnings are closely watched.

It had to happen sooner or later, and Monday was the day. VIX, the best-known index of market fear, leaped from two year lows recorded late last week. The climb in VIX to above 12 early Tuesday kept it historically low, but well above last Friday’s lows of below 10.5. A higher VIX could point to choppier trading in the coming weeks, and that’s not too surprising considering all the action in earnings as well as in Washington.

We noted last week that gold continues to pivot around the $1,200 level (see below), just as crude oil keeps ricocheting between $50 and $55 a barrel. Gold kept up that trend early this week, as did oil. However, some say the tepid U.S. Q4 growth reported last week and the recent political fireworks could underpin the gold market in days ahead.

Support for the S&P 500 Index (SPX) looks to be in the 2275 area, a former resistance point. Psychological resistance is at 2300.

Gold

FIGURE 1: MAKING NEW MIDDLES?

Gold futures, plotted here over the last 20 years through Monday on the TD Ameritrade thinkorswim® platform, continue to pivot around $1,200 an ounce, near the mid-point of price action since December 2005. Source: TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Gold in the Middle: We often look at new highs and new lows as key points, but what about those middles? In late 2005, when gold broke the $500 per ounce barrier for the first time since the 1980s, some saw this as the turning point, and it didn't really stop until it reached $1,900 in the summer of 2011, after which gold began its 4-year descent, bottoming out around $1,040 in December 2015. As gold continues its pivot around the $1,200 mark these past few weeks, it may be worth noting that $1,200 would also be the midpoint between $500 and $1,900.

BOJ Keeps Rates Unchanged: While the Fed meeting that starts today may take most of the headlines, don’t forget that the Bank of Japan (BOJ) also had a policy meeting that ended Tuesday, and elected to keep rates and its bond-buying program unchanged. Though Japan’s economy remains far from generating the 2% inflation that BOJ has as a target, there is growing pressure on the BOJ to decrease its bond purchases, Barron’s reported over the weekend. But even a hint at an easing of the program could drive up interest rates and the yen, possibly hurting demand for Japanese exports. Despite the BOJ’s decision to stay the course, the yen climbed Tuesday after the BOJ announced its decision, helping send the Nikkei down sharply on concerns that a strong yen could hurt exports. The good news is that the BOJ does see signs of strength in Japan’s economy, raising its economic growth projection and predicting 2% inflation by fiscal 2018.

Key Price Data Meets Expectations: Core PCE prices, reportedly one of the Fed’s favorite statistics for measuring inflation, looked pretty benign Monday, rising just 0.1% in December compared with pre-report analyst estimates for a 0.2% rise. And year-over-year, core PCE prices rose 1.7% through December, the same percentage rise seen for the year-over-year data the previous month. Remember, the Fed’s target is 2% for inflation. Personal income rose 0.3% in December, compared with consensus for 0.4%. The rather vanilla PCE data follows last Friday’s government first estimate for Q4 gross domestic product (GDP) of 1.9%, below analysts’ estimates. It could be interesting to see if the Fed mentions any of this fresh data in its post-meeting statement tomorrow.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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