All Eyes on the Fed Next Week: Will They or Won’t They?.
With stocks already in a corrective phase on Wall Street, next week’s long-awaited Federal Reserve meeting may not spur a wild market reaction, even if the central bank hikes rates for the first time in almost a decade. For the ninth time in a row, the Standard & Poor’s 500 Index just posted a weekly return that amounted to a reversal of the prior week’s performance.Wall Street is bracing for what could be a radical shift in the playing field for investments ranging from stocks to bonds to commodities and real estate.
Economists are about equally split on whether the long-awaited move will come, though futures market trades are pointing to at least one more month of the Fed delaying its 0.25 percentage point increase in the fed funds rate. A hike would mark the beginning of the end of an extraordinary era of Fed easy money since the 2008 financial crisis that has kept borrowing costs historically low for consumers and businesses, and underpinned the six-year bull market. Economists are split over whether policy makers will alter the benchmark on Sept. 17, while fed fund futures indicate an even slimmer chance of a move. Federal Reserve takes centre stage in the coming week, eclipsing industry data from China, another grim inflation reading from the euro zone and rate decisions in Japan and Switzerland. The Federal Reserve meets this week and some investors expect it to boost short-term interest rates — kicking off the first tightening period in more than a decade. * Respect the importance of the move.
For some, the repricing of the S&P 500 in recent weeks, spurred mostly by weakness in China and other foreign markets, may have actually given the Fed room for the rate hike. “It has made the world a safer place for the Fed to do whatever they have to do in the next few weeks,” said John Manley, chief equity strategist at Wells Fargo Funds Management in New York. Guessing whether the Fed hikes rates on Thursday or opts for a later date, perhaps December, is something of a futile exercise because even the rate setters appear to be wavering and the decision will probably come down to the wire. Traders have already priced in the increase, and whether it comes in September, October or December “isn’t going to make an enormous difference,” he said. Of 19 economists and investment strategists surveyed by Action Economics on Friday, 11, or 58%, predict the Fed will delay the move after recent turmoil in financial markets — a share that has risen steadily over the past two weeks. “You could add more volatility and more hesitation and fright to markets that are already fearful,” says Diane Swonk, chief economist of Mesirow Financial.
Australia’s dollar staged its biggest weekly advance in two years, with traders reducing bets the Reserve Bank of Australia will cut its cash rate by year-end. An unexpected drop in the jobless rate to 5.1 percent and an upward revision in second quarter growth to 3.7 support calls for a hike as the labour market tightens and utilisation is at its best level since the global financial crisis. Traders still expect the next month to be somewhat jittery, and may be watching industrial output and retail sales data out of China early next week for signs of just how weak Asian markets could be. Already, the recent selloff is likely, over the next 18 months, to reduce job growth by about 500,000 and push up the unemployment rate by 0.2 percentage points compared to what it would have been otherwise, according to Barclays Capital. Of course traditional thinking is that lower oil and gasoline prices will ultimately help consumers and encourage them to spend more money which will lead to economic growth.
Sweden’s krona jumped after a report showed its economy expanded faster in the second quarter than originally estimated. “I could see why people want to de-risk heading into the meeting,” said Daniel Brehon, a New York-based currency strategist at Deutsche Bank AG. “The dollar longs are still the consensus position out there. To the extent that all positions are being wound down, the dollar’s going to fall in the leadup to the Fed.” The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, had its first weekly decline since August.
Spot and 1-month VIX futures are tracking each other and are both higher than 2- and 3-month VIX futures, in a rare inversion of the curve that points to sharp short-term gyrations. By cooling off the economy, and thus keeping eventually higher inflation at bay longer, “the markets have already done much of the Fed’s dirty work,” Goldman Sachs wrote to clients. So I turned to one of my favorite independent research analysts: Stephen Schork who writes The Schork Report, and got a dreadful picture of the global economy. On Thursday, the index touched the lowest since Sept. 1. “The case for September is not as compelling now, but, at the same time, it hasn’t been ruled out,” said Win Thin, the New York-based global head of emerging-market strategy at Brown Brothers Harriman & Co. “There’s been really no fundamental drivers this week, that’s the frustrating thing. Fresh industrial output data, due in Beijing on Sunday, are expected to show an uptick in growth to 6.4 percent in August from 6.0 percent a months earlier, partly a factor of lower commodity prices, but the figure is still below trend as economic growth slows to its lowest pace in decades.
It has become the norm after a Fed meeting for stocks to be volatile, often changing direction various times between the time of the statement and the market close a couple hours later. “If the Fed can’t be confident that the market can handle a 25 basis point hike, that doesn’t play well with investors,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. Inflation remains well below the Fed’s annual 2% target and recent overseas weakness is likely to further tamp down prices by strengthening the already muscular dollar, says Deutsche Bank economist Joseph Lavorgna. Fed funds futures contracts, a bellwether for traders, currently embed a 28 percent likelihood — although their odds have been as high as 54 percent and as low as 24 percent during the last two months. Fears of a hard landing, the prospect of deflation and billions of dollars spent on keeping the yuan steady raise the prospect of more rate cuts and currency devaluation by Beijing, setting markets up for more volatility. The confusion has made for some “pretty interesting” swings in stocks thanks to a “back-and-forth debate about whether the Fed’s going to hike or not hike,” said Brent Schutte, senior investment strategist at BMO Global Asset Management in Chicago, which manages $250 billion.
The currency climbed against most of its major peers during the past three months in anticipation of a Fed liftoff, with Brazil’s real, the New Zealand dollar and South African rand the biggest losers. In Europe, the key item will be September euro zone inflation data due on Wednesday, likely supplying another arguments for the European Central Bank to beef up quantitative easing. In contrast, during expansionary times when the Fed was lowering rates, stocks turned in an annualized gain of 10.6% when inflation averaged 4.2%, Johnson says. * Don’t abandon stocks completely. For some, it would be the stamp of approval the U.S. economy has been expecting after a strong recovery in job creation and five consecutive quarters of GDP growth. “I would be more concerned if they did not raise rates, because that would be a sign of maybe slowing economic activity,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
Earlier this year the move seemed all-but certain to happen at the Fed’s September 16-17 meeting based on strengthening U.S. economic data in the first half of 2015. The big inflation miss and a modification of quantitative easing are just the latest in a long list of troubles for central banks around the globe as developed nations struggle with weak growth and anaemic inflation. “Are central bankers losing credibility? Preliminary results from our survey show that 68 percent of investors believe so,” RBS said in a note to clients. “Yet, we are stuck in a world where central bankers’ words will determine investment decisions, often beyond fundamental reasoning.” Governor Haruhiko Kuroda is expected to offer a bleaker view on overseas economies and may lower its assessment on the country’s exports next week, sources told Reuters. Energy, consumer goods, utilities and food stocks outperform during periods the Fed is tightening rates, Johnson says, with average annual returns of 11.5%, 8.4%, 7.8% and 7%, respectively. * Avoid the bond-fear hysteria.
Some 17 percent of respondents mentioned unfavorable news about stocks, the highest share since the height of the last financial crisis in October 2008. Also due out next week are a report on August retail sales on Tuesday; the consumer price index, a key measure of inflation, is due out Wednesday; a report on housing starts is out Thursday; and on Friday its quadruple witching, or the expiration date of various stock index futures, stock index options, stock options and single stock futures. The Swiss National Bank is also expected to keep policy steady but markets expect the bank to say that it was ready to cut the deposit rate even further into negative territory if necessary. The average return on the 10-year Treasury note during expansionary periods, 6.4%, is practically the same as the 6.3% during restrictive periods, Johnson says.
Federated manages about $360 billion. “Whatever happens with rates isn’t going to reset the direction of the market.” Rather, third-quarter earnings and “what companies will say about the fourth quarter” and their expectations for 2016 will “weigh more in importance,” Kaufler said. The firm oversees more than $100 billion. “Perhaps once they raise rates, kind of like ripping the Band-Aid off, then markets can go ahead and focus on the underlying fundamentals, which quite frankly aren’t that bad.” Global stocks rose this week as China was able to rein in equity-market volatility and thwart speculation of further currency depreciation, easing concern its financial-market turmoil will derail growth. When you have plunging commodity prices, and we’ve seen this across the board in oil and in the industrial metals, this is simply telling us that we’re not seeing economic growth. With so much volatility day-to-day and week-to-week, this shows that “no one wants to be caught long over the weekend,” Schutte said. “People aren’t willing to look past the few weeks.
Real estate is often described as a single asset class, but investors are advised to understand the nuances of different markets as the reactions to rates are very different, Johnson says. Equity real estate investment trusts — which own everything from apartment buildings to commercial real-estate — do well during times of Fed hikes, just not as well. When you look at our own numbers (such as durable goods orders and the PMI), they are screaming at us that something is wrong on the industrial side of this economy. This is why China devalued the yuan a few weeks ago. the Chinese are having problems with their exports as is the U.S. — as is everybody because of these doldrums. But back in the spring when the banks went ahead and did the reformation on credit facilities for the exploration and production (E&P) companies, they looked at high prices out into the future and the ability to hedge.
There’s certainly a tremendous amount of uncertainty out there, and with that uncertainty you’ll start to see people pullback, hold their cards close to their chest and be afraid to make decisions. Q: What do you say to people who feel a drop in gas is only a positive because it’s going to help so many sectors of the economy,like transportation and industrial, because their costs are going down?
So where they’re saving money on their transportation costs, they’re getting hurt on (the strong) dollar, on bringing those dollars back home at these prices. So for some of these companies where you have that boost, it’s a hamster wheel because one reason earnings are lower is because of the strength of the U.S. dollar. If I save $100 a month at the gas pump but my affordable care for my family premium went up $160 a month this past year, I’m saving $100 but I’ve already spent that $100 on my family’s health care and I have to dig deeper for another $60 a month.
The People’s Bank of China has instituted itself as the world’s largest specialist firm adding liquidity and ordering liquidity to its markets, and it’s still not enough.