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Fed Countdown Underway, But No Surprises Expected as Rate Hike Looks Baked In

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June 14, 2017

(Wednesday Market Open) The Fed decision is just around the corner, but before that, there’s some key data to mull, including May retail sales and the consumer price index (CPI). Futures trading pointed to a slightly higher open.

CPI fell 0.1%, compared with Wall Street analysts’ expectations for a 0.2% rise. So once again, inflation appears to remain subdued. Retail sales fell 0.3%, compared with pre-report Wall Street estimates for an unchanged number. Stripping out volatile automobile and gasoline sales, however, retail prices were unchanged from April’s strong figure, not a bad result. Consumers are still spending, and as much as some retail stores are struggling, at the end of the day, the consumer seems to be doing all right.

The data came after a resilient market rebounded Tuesday, with record high closes for the Dow Jones Industrial Average ($DJI) and the S&P 500 (SPX). The Nasdaq (COMP) also posted big gains after its recent sell-off. Trading might be light today ahead of the Fed’s decision and press conference early in the afternoon.

Pretty much nobody in the world should be shocked when the Fed raises rates, as chances stand at 99.6% this morning, according to futures trading. The Fed’s statement is scheduled for 2 p.m. ET and Fed Chair Janet Yellen’s press conference is at 2:30 p.m. Stay tuned for our analysis later today.

Info tech got its mojo back Tuesday, climbing 0.85% to lead all sectors except for materials, which climbed more than 1%. The so-called “high five” tech stocks, which include Apple (AAPL), Alphabet (GOOG), Facebook (FB), Microsoft (MSFT), and Amazon (AMZN) all finished in the black. The financial sector also gained, possibly on expectations for a Fed rate hike.

Even after its two-day swoon, info tech remains in pole position when it comes to sector performance year to date, with gains of more than 17%. Holding in second is health care, with 12% gains. Consumer discretionary is the other sector with double-digit gains, but utilities and consumer staples have both climbed 9%.

Looking more closely at these numbers, the takeaway appears to be that even though tech has been on a tear until recently, it’s not the whole story this year, and a number of other sectors are doing rather well. Furthermore, the strong performers include both cyclical and defensive sectors, another common sign of a healthy market.

As tech shares advanced, volatility declined. The VIX fell from above 12 on Friday down to 10.53 by early Tuesday. VIX has been a hot potato this year. The second it turns lower people start dropping it like a bad habit.

Crude oil also remained under pressure early Wednesday, sinking to near $46 a barrel on signs of growing U.S. stockpiles. Official U.S. weekly supply data are due later today.

Overseas, China reported factory output growth of 6.5% in May, a little above analysts’ expectations, Reuters reported. However, investment slowed. It’s important to keep an eye on the Chinese economy, which has showed signs of softness lately. Remember that just a couple years ago, weakness in China had a ripple effect on U.S. stocks.

Info Tech

FIGURE 1: TECH TURNAROUND.

The info tech sector, plotted through Tuesday on the thinkorswim® platform from TD Ameritrade, advanced after falling to nearly one-month lows earlier in the week. The sector is now basically back to its late-May levels, and remains up more than 17% year-to-date. Data Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Getting to the Core on Prices: Producer prices for May were unchanged, the government reported Tuesday, but keep in mind that a lot of that was due to cheaper energy. Looking at the core number, which strips out volatile energy and food prices, producer inflation ticked up 0.3%, a little above Wall Street analysts’ expectations, in part due to higher import prices and a rise in service costs. Import prices might have gotten a boost from the weaker dollar. So even though the headline number didn’t indicate rising prices, there wasn’t really anything in the report to divert the Fed from its current bias toward rate tightening, Briefing.com noted.

Industrial Production Up Next: Industrial production has been on a roll, climbing a full 1% in April after a 0.4% gain in March, both strong monthly numbers for this key economic metric. Strength in manufacturing and auto production drove the total higher in April, while mining and utilities also looked robust. When all was said and done, it was the best month for industrial production since March 2014. That makes the monthly comparison for May, due out tomorrow, a bit challenging, and analysts expect no change, according to Briefing.com. Some even see chances for a drop. Even a slight retreat month-to-month, however, would put the figure well above year-ago levels. The total has risen four of the last five months. Industrial production, remember is another factor that helps determine gross domestic product (GDP).

Speaking of GDP: The Atlanta Fed’s GDP Now projection for Q2 GDP fell to 3% late last week, down from the previous outlook for 3.4%. Many analysts also look for around 3% growth, but estimates have been falling and Friday’s disappointing wholesale inventories data was another potential weak sign. It’s still a while until the government’s first estimate for Q2 GDP, but one final estimate for Q1 GDP is coming up the week of June 26. Last time out Q1 GDP got raised to 1.2%, which is still rather tepid.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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