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Market Update

Markets Digest Fed, Hurricanes, Earthquakes, Economic Data

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September 21, 2017

(Thursday Market Open) The three major benchmarks were dipping slightly into negative territory in the early going, a day after the Federal Reserve left interest rates unchanged but said it was planning to begin unwinding its $4.5 billion balance sheet next month.

Overnight, the Bank of Japan left its monetary policy intact too, as widely expected, though it appeared there was some unforeseen dissent with an 8-1 vote, according to Reuters.

Also making headlines are earthquakes in California and Mexico, as well as Hurricane Maria, which appeared to devastate much of Puerto Rico yesterday. In Europe, the Central Bank is holding a conference on inflation that might be of interest.

Yesterday’s trading patterns were interesting to watch on a Fed meeting day, and might offer a good tutorial in how markets rise and fall on news. Ahead of the meeting, the markets barely budged, as what tends to happen when waiting on news of what the Fed’s next move will be.

Then the Fed announced it would keep interest rates as is, and what its plans were to start unwinding the balance sheet. Some market pundits had labeled the statement “hawkish,” which might, or not, have had some impact on the sharp and immediate turn to the downside. (See below.)

When Fed Chair Janet Yellen started talking during the post-decision conference call, the blows to the market appeared to soften. By the time her question-and-answer period with reporters ended some 65 minutes later, both the Dow Jones Industrials ($DJI) and S&P (SPX) had flattened.

By the close, they had edged into positive territory, giving $DJI its ninth straight session of finishing at a record and nudging the SPX onto a fresh peak too. The Nasdaq Composite (COMP) fell, but only by a few points and off the intraday lows.

Financials were on the rise, possibly because the Fed indicated that another step up in interest rates is still on the table for this year. The markets see it happening in December, according to the CME FedWatch probabilities tool, which stood at better than 75% early today. Ahead of yesterday’s meeting, it was at 56%.

In the early going today, the three benchmarks were barely budging. That could change as the markets absorb the bevy of economic reports out today. Typical "safe-haven" assets like gold fell, off 1.8% in the early going; the dollar rose, then slipped. The 10-year Treasury yield slipped to 2.262%, after jumping yesterday.

Crude oil prices, which had been trading solidly above the $50 level since last week, were losing some oomph this morning. (See below.)

DJIA chart

FIGURE 1: DOW'S RECORD CLIMB.

The Dow Jones Industrials ($DJI) hit another record close yesterday, making it nine straight days on the upside. The benchmark was marginally lower at the open. Data sources: CME Group, Dow Jones Industrials. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Fed Lowers the Bar: Yesterday, Federal Reserve Chair Janet Yellen admitted during the press conference that the committee didn’t understand exactly what was keeping inflation subdued. She also noted that the Fed expects the widespread hurricane damage to pull the economy down in the third-quarter and possibly longer, which might explain why the Fed shifted its target-date timelines on interest rates and inflation.

On the Fed’s “dot map,” 12 of 16 members favor a third interest-rate increase this year, but now see the rate reaching 2.8%, rather than 3%, by 2020. The forecast for next year is still at 2.1%. As for inflation, the Fed is now forecasting its 2% target level will be reached in 2019, rather than next year, which is projected to be at 1.9%.  

Crude Oil Falls: The price on WTI crude oil slipped in the early going, probably because data from the Energy Information Administration released late yesterday showed that supply climbed by 4.6 million barrels last week. But prices are still holding above the $50 level.

Market observers are likely to be watching those levels as the Organization of the Petroleum Exporting Countries meets Friday in Vienna. They are expected to continue discussions on extending oil output caps. Reuters reported today that the Russian energy minister said the OPEC and non-OPEC countries would also talk about an output monitoring procedure. Russia is not in OPEC.

Jobless Claims Fall: U.S. weekly jobless claims fell by 23,000 to 259,000, below the 300,000 some Wall Street analysts were anticipating. Last week’s reading was pulled down to 282,000 from 284,000.

Forecasts and claims going forward are likely to be bumpy—and temporary—as the impact of hurricanes subsides.   

Good Trading,

JJ

@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com    

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