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Hurricane Replaces Debt Ceiling On Front Pages, While ECB Keeps Rates Unchanged

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September 7, 2017

(Thursday Market Open) Eyes turn overseas this morning as the European Central Bank (ECB) announced it’s keeping interest rates unchanged. Meanwhile, Hurricane Irma has Florida in its sights, and investors are pondering Wednesday’s mild market recovery from the sell-off on Tuesday.

With yesterday’s agreement between President Trump and the Democrats, the debt ceiling is off the front page. That figures to take one negative away. However, Hurricane Irma replaces the debt ceiling on the front page, with Florida under evacuation orders as Hurricane Irma looms this weekend. Hurricanes Harvey and Irma are terrible, most importantly from a human point of view, but also from an economic point of view as they slow down local economies.

ECB President Mario Draghi is speaking this morning, and media reports said he remains confident inflation will eventually rise toward the ECB’s targets even though there’s still downside risk for the European economy. The question for many investors is when the ECB might begin drawing down its balance sheet. Signs of recovery in the European economy have many analysts thinking the ECB might pull back, and that could be one reason the euro is advancing vs. the dollar early Thursday.

Asian markets bounced back a bit overnight thanks to some better than expected economic numbers.

Back home, a slew of Fed speakers take the microphones today. Four different Fed officials are scheduled to speak publicly, including Kansas City Fed President Esther George this evening and Cleveland Fed President Loretta Mester at midday. Earlier this week, dovish remarks from another Fed official contributed to pressure on the dollar and surging bond prices.

Data look a little light as we approach the weekend. July consumer credit looms later today and July wholesale inventories are due tomorrow morning. Wholesale inventories rose moderately in May and June, and Wall Street analysts’ consensus is for a 0.4% increase in July. The Fed’s Beige Book, released Wednesday afternoon, didn’t present any major surprises, as the Fed noted “modest” to “moderate” economic growth across various U.S. regions.

Retailers contributed some of the top performances Wednesday, with Gap (GPS), Macy’s (M), and Kohl’s (KSS) all rising sharply. Consumer discretionary was strong overall, along with energy and financials as investors appeared back in a buying mood after Tuesday’s sharp sell-off.

We’ve seen this pattern all summer, with tensions over North Korea flaring up and knocking the market around for a day or two before fading. There’s no guarantee the stress levels won’t rise again, but in the meantime, there seems to be a sense that each retreat might represent a buying opportunity. That said, the S&P 500 Index (SPX) hasn’t made a new all-time high in several weeks, implying that investors don’t want to get too long either in case of another pullback.

So after two days of a short week, the SPX is down 0.4%. That’s not a big move considering all the hemming and hawing about Tuesday’s sharp losses. Basically, the SPX continues to rest in a range that sits roughly between 2420 and 2480. It’s been trading back and forth between those two numbers since early July. The 50-day moving average sits near the middle of that range at 2453, and that might represent a technical support level.

While some of the rally Wednesday might have reflected easing concerns about North Korea, the market also seemed to get a boost from politics right here in the U.S. There were headlines starting late in the morning about President Trump agreeing to a plan to tie raising the debt ceiling to hurricane relief, which Democrats also support. Some Republican leaders weighed in against this, but if it does come to pass, that could take some of the Washington noise out of the picture for a while and remove a potential barrier to rallies.

We talked about caution yesterday, and it’s still out there. Gold eased a little Wednesday but remained near its 2017 highs. Bond prices remain lofty (see below), and VIX is elevated compared with last Friday’s benign readings. Keep an eye on the dollar, too, which is under pressure from continued weak inflation readings and declining odds of an additional 2017 rate hike.

Dollar Index

FIGURE 1: DOLLAR JUST DOESN'T GO AS FAR THESE DAYS.

Nothing tells the story of the declining dollar better than this one-year chart, which shows how the U.S. dollar index peaked at above 103 back in early January before winding steadily downward even as the S&P 500 Index (SPX), represented by the purple line, rose steadily to a series of new highs. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Gone “Fisching”: The surprise retirement announcement Wednesday by Fed Vice Chairman Stanley Fischer raised questions about possible changes to Fed policy moving forward. Fischer is known as an inflation hawk and also as an academic expert on interest rates, bringing gravitas to the Fed’s deliberations. His retirement goes into effect Oct. 13, and he said he’s leaving for personal reasons. Initial market response appeared muted, and CME futures didn’t move much, still showing odds of a rate hike by end of the year below 35%. Stay tuned for buzz around possibilities for Fischer’s replacement, which is up to President Trump. Like many presidents before him, Trump seems to prefer low interest rates, so perhaps he’ll be looking for a dove.

Teaming Up: It hasn’t been that earth-shattering a year so far in terms of mergers and acquisitions (M&A), though Amazon’s (AMZN) purchase of Whole Foods drew a lot of attention and shook up the retail sector. Action is definitely down from the recent 2015 peak. But a legal expert on M&A, speaking on CNBC Wednesday, said M&A activity might pick up as the year winds down, especially in the media and biotech sectors. There’s a sense, she said, that many executives were waiting to see if Congress could pass a tax reform package this year, but now that doesn’t appear to be a slam dunk so management at various companies might decide to move forward on their own initiatives, including M&A.

No Retreat For Bonds: The bond market stayed strong Wednesday even as stocks bounced back a bit from Tuesday’s retreat. Benchmark 10-year bond yields remained near 2017 lows of around 2.07%, a level last seen around last year’s U.S. presidential election. At that point, the market was on its way to a fierce rally that eventually took the yield to 2.61% by mid-December, a level tested again in mid-March. Since then, however, it’s been mostly a downhill run, and yields took another hit this week from geopolitical uncertainty and dovish Fed comments on inflation. Low bond yields can be helpful in the sense that companies can easily finance new projects and the government doesn’t have to pay up to service its debt. On the other hand, low yields make it hard for banks to profit, and also sometimes draw investor money toward safe-haven sectors like utilities rather than more aggressive areas like info tech and finance. It hasn’t gotten much attention, but utilities are the third-best performing S&P 500 sector this year, following info tech and healthcare.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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