The Federal Reserve huddles today for the first session of a two-day meeting that industry analysts believe is the closest interest rate policy call in recent memory.
As for traders, the sidelines are shoulder to shoulder, crowded with market participants who are avoiding big moves in light-volume trading. That's a lot of pent up money.
A complicating fresh round of mild inflation data here and abroad greets the convening Fed policy makers, although gains in market interest rates show some participants remain convinced the Fed "bias" is toward higher rates. Eventually.
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Although market reaction is always tough to predict, inaction by the Fed could prove just as volatile for stock markets. Discussion could quickly turn to the odds of an October or December rate hike. A few policy hawks may toss in concerns that the Fed is letting a golden opportunity to start the slow unwind of ultra-loose rate policy slip away, perhaps bullied into inaction by a volatile Wall Street?
And should Janet Yellen and crew push the button on the first rate hike since 2006 tomorrow, most analysts believe a knee-jerk stock selloff could follow. That's because ultra-cheap borrowing rates have been one key driver of a long-running stock bull market only truly tested a few weeks ago. When the dust settles, investors may have an opportunity for a fresh look at individual stocks that they believe have strong fundamentals, perhaps discounted in step with broad market weakness.
No doubt the case for a Fed rate hike is complicated by market turmoil, China's currency devaluation, China's stock market swoon, and China's economic slowing (quite a theme, right?). The rest of the globe must be considered, too. Reported Wednesday, inflation across the euro-zone unexpectedly weakened in August to 0.1% from 0.2% in July. That's a development that could fuel speculation the European Central Bank may have to expand its bond-buying program. The news emphasizes the gap between the euro and the dollar. But a strong dollar, which boosts U.S. consumer purchasing power, extolls a price, too. It could continue to nick the shares of multinational U.S. companies.
Against this backdrop, a key measure of broad-market volatility, the CBOE Volatility Index ($VIX) fell 7% Tuesday but remains above 20. Market interest rates are tipping higher as the Fed convenes. U.S. two-year Treasury yields hit their highest in over four years on Tuesday, with longer-term yields at their highest in nearly two months, moving in thin trading conditions and tracking a move in the German market. Benchmark 10-year yields hit 2.28%, up from 2.18% late Monday.
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Bottom line: The Fed has a lot to consider. So do investors. Tune in tomorrow.
FIGURE 1: PRE-FED CHURN. The S&P 500 ($SPX), charted above, put up a respectable performance in a choppy Tuesday session; it's lower early Wednesday. SPX has held near 1950, moving in a narrow band, over several recent sessions. Data source: Standard & Poor's. Chart source: TD Ameritrade's thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Hint of Inflation? Not really. The U.S. consumer price index fell in August for the first time since the start of the year, pulled by the tug of weaker gas pump prices. The CPI dipped a seasonally adjusted 0.1% last month, the first decline since January. Excluding food and energy, so-called core consumer prices rose 0.1% in August. But notably, there's no pick-up in the longer-running rate of inflation. Over the past year the main CPI has risen by an unadjusted 0.2%, the same as in the prior month. Core prices are up 1.8% in the same span, also unchanged.
Japan Marked Down. Another example of the global backdrop that's challenging Fed decision-making? Japan. Standard & Poor's cut Japan's sovereign debt rating one notch, as its economy spins with little traction nearly three years after Prime Minister Shinzo Abe took power. "Despite showing initial promise, we believe that the government's economic revival strategy—dubbed ‘Abenomics'—will not be able to reverse this deterioration in the next two to three years," S&P said.
Beer Buyout? Even with market focus nearly singularly focused on the Fed, deal news still brews. Among brewers, that is. SABMiller (OTC: SBMRY) gained after the beer giant said rival Anheuser-Busch InBev (NYSE: BUD) indicated it plans to make an offer for SAB. That means Miller and Bud could be one. SAB's board publicly confirmed the press speculation and said it has informed SABMiller that it intends to make a proposal, but that no formal offer had yet emerged, say financial media reports. A merger of the world's two largest brewers has been speculated for years, but AB InBev's biggest shareholder, Brazilian private equity group 3G, is now ready to have talks with SAB, the Financial Times said. The Molson Coors tie-up complicates things, so some shuffling there may first have to take place.
Good trading,
JJ
@TDAJJKinahan
This piece was originally posted here by JJ Kinahan on September 16, 2015.
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