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Checking In With The Fed: September Minutes Could Provide Insight

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October 11, 2017

(Wednesday Market Open) Last month, the Fed announced it would begin unwinding its $4.5 trillion balance sheet. Today, with the release of minutes from the Fed’s September meeting, investors get to look under the hood and ponder the thought process that went into that decision.

The minutes are due at 2 p.m. ET, and could also provide further insight into the Fed’s view of the economy and interest rates. Pre-market trading pointed to a slightly lower open as investors await not only the Fed minutes but also the start of earnings season and some key data due later this week.

Wednesday’s session looks like it might be a waiting game ahead of Thursday and Friday’s big bank earnings and September inflation and consumer confidence data. The week is a bit back-loaded, and Wednesday could be a little slow, with thin volume possible.

As always, anyone trading a thin market might want to be prudent about possible sudden moves in prices. That said, volatility remains quite low, with the VIX still pivoting around 10. VIX, perhaps the most closely watched indicator of future market volatility, has been unusually subdued throughout 2017, and that’s reflected in the market’s performance. There have only been eight sessions this year in which the S&P 500 gained or lost 1%, compared with the average of 50 a year, said research firm CFRA.

As earnings season gets underway, analysts at S&P Global look for S&P 500 company average earnings growth of 4%, but some Wall Street analysts have higher projections in the 5% area. That’s still lower than the 10.8% EPS growth recorded in Q2.

The market bounced back Tuesday, making up most of what it lost Monday. The financial and energy sectors led the way. Stocks got a big boost when the International Monetary Fund (IMF) came out and raised expectations for global growth.  This was a positive report for the U.S., Eurozone, and Asia, and helped lead the Dow Jones Industrial Average ($DJI), S&P 500 (SPX) and Nasdaq 100 (NDX) to new intraday all-time highs.  

Another big story was crude oil’s jump to nearly $51 a barrel after it had fallen below $50 earlier this week. The 2.7% gain was oil’s biggest daily rise in two weeks, and showed a little resiliency in the market. An announcement by Saudi Arabia that it planned to cut oil exports might have given crude a boost, and a drop in the U.S. dollar also seemed to play a major role in oil’s strength. Stay tuned today for weekly U.S. crude oil stockpile data. Crude traded about flat early Wednesday. The energy sector rose Tuesday, not surprisingly considering the strong gains in oil.

Another sector showing some oomph Tuesday was consumer staples, which had come under pressure in recent weeks. It led all sectors with a nearly 1% gain. The big mover was Walmart (WMT), which confirmed earlier earnings guidance and announced a share buyback. The big gains for WMT seemed to help light a fire under a number of other retail names including Target (TGT) and Costco (COST).  

Financials performed well on Tuesday ahead of big bank earnings that start tomorrow morning with Citigroup (C) and JP Morgan (JPM). Following that, Bank of America (BAC) and Wells Fargo (WFC) report before the open on Friday. Financials represent the vanguard of earnings season, but airline companies are also getting lined up on the runway early on.

Delta Airlines (DAL) delivered its results Wednesday morning, and beat Wall Street’s estimates despite hurricanes and higher gas prices. You never want to make too much out of one earnings report, but DAL’s results in the face of challenges seemed to kick off earnings season in a positive way. There’s a long flight ahead, though, so keep the seat belts on.

Crude oil

FIGURE 1: OIL HEATS UP

Crude oil started the week down below $50, but heated up Tuesday to rise to nearly $51, its biggest one-day gain in two weeks. News of a possible cut in Saudi exports appeared to give the market a boost. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Don’t Forget the Data: Investors tend to zero in on earnings at this time of the quarter, and for good reason. They’re staring big bank earnings in the eye Thursday and Friday and that could help shape the market’s performance later in the week. On the other hand, a lot of data still hits the wire in coming days, including the producer price index (PPI) on Thursday. Following that comes a big data day on Friday, with the consumer price index (CPI), Michigan sentiment, and retail sales forming a trifecta that could shed more light on economic performance in September and early October. Stay tuned tomorrow for Wall Street analysts’ estimates going into these reports.

Interest Rate Impact: Some sectors making gains Tuesday included utilities, consumer staples, and telecom. But perhaps investors should keep a wary eye on some of these so-called “defensive” sectors over the coming days and weeks, because they may already be feeling heat from the impact of rising Treasury bond yields and an expected interest rate hike. While telecom has surged over the last month, utilities and consumer staples are the two worst sector performers over that time period. Often the fear is that a rising rate environment could pull some investors away from dividend-paying names in those sectors. That’s not a big factor yet with 10-year yields still relatively low at 2.33% as of Wednesday morning, but with the average S&P 500 dividend yield at 1.96%, the gap might be getting to the point where fixed income products could generate more appeal.

Why So Much Emphasis on Oil? We talk about crude oil a lot, and that’s because it underpins so much of the economy. Falling oil stocks can often signal growing demand around different industries, possible a sign of economic vigor. And vice versa, as well. Oil can also help grease the skids for some industries like airlines and trucking, giving them a potential boost to profits when input costs remain low. At this point, with oil hovering near $50, it looks like it’s found a place where both buyers and sellers are relatively comfortable. It hasn’t moved much above or below $50 in months.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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