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Fed Rate Hikes: The Only Certainty Is Uncertainty .

Nasdaq’s Market Intelligence Desk (MID) is designed to provide critical touch-points for timely trading analysis and market information.

Fed Rate Hikes: The Only Certainty Is Uncertainty

Wednesday, June 13, 2018, 10:36 AM, EST
  • NASDAQ Composite +0.37% Dow +0.08% S&P 500 +0.13% Russell 2000 +0.01%
  • NASDAQ Advancers: 1106 Decliners: 1052
  • Today’s Volume (100 day avg) +7.5%

The markets opened a little higher once again with both the R2K and Nasdaq Composite touching record highs.  Traders are expecting that the FOMC will increase rates this afternoon, but otherwise it remains a relatively quiet week in terms of trading.  Despite the abundance of macro news this week there have been few if any surprises, and thusly market volumes have been soft since Friday morning and no indications that will change much today.  The sector view is mixed with Healthcare (+0.6%) leading and Materials (-0.5%) and REITs (-0.7%) trailing.  

  • The M&A window is openfor mega cap companies. Following U.S. District Court Judge Richard Leon’s ruling in favor of AT&T (T) to proceed with its acquisition of Time Warner (TWX) which was initially announced in October, 2016. The DOJ failed to make its anti-trust case and this will presumably open the door for many more high profile mergers to move forward. This decision prompted proposed mergers to grab headlines including assets of Twenty-First Century Fox (FOXA) being acquired by either Disney (DIS) or Comcast (CMCSA),Cigna’s (CI) bid for Express Scripts (ESRX) and CVS Health Corp (CVS) bid for Aetna (AET).
  • The FOMC is in focus today as Chairman Powell is expected to raise the benchmark interest rate by a quarter point this afternoon. This will be the 2nd raise this year. The Chairman’s press conference following the decision will give us a clue if the FED is still looking at 3 rate hikes this year or 4. The key will be whether the follow up testimony is hawkish or not. Key hawkish items to look for include a more optimistic outlook for the economy, an increase in its interest rate forecast or the announcement the Powell will hold a press conference after every FOMC meeting in the future. Currently economists are giving a 61% change of another rate hike at the September meeting. We will see if that changes after today’s meeting.
  • Crude oil moved to session highs following bullish inventory data, but gains are muted as production curbs are nearing an end. Russia is proposing going back to October ’16 output levels and the Saudis are floating the idea that OPEC increase output 500k bpd now and again in Q4.  OPEC meets in Vienna next week so no doubt this will be a top discussion point.  In the meantime IEA says global oil demand will grow steadily in 2019 with total output hitting 1000 million bpd by Q2, but they also not see another sharp price increase like mid-2017. 
  • Inflation continues creeping higher with the topline May Producer Price Index exceeding estimates with a 0.5% advance, well ahead of April’s tepid +0.1%, and stripping out food and energy the index again exceeded expectation with a 0.3% gain. Year over year top-line PPI hit 3.1%, the highest since late 2011.  The report indicates over 80% of the price increases were related to higher fuel cost, but after two monthly +5% gains crude oil is down 1.6% in June and that might curb the pace of increases in the near term.

Technical Take: Rates: The Only Certainty is Uncertainty

Equities are relatively quiet ahead of today’s FOMC meeting.  Markets are pricing in an 84% probability that the Fed will hike rates another 25bps.  As always the committee’s statement and following press conference will be parsed for clues on the pace of future hikes.  The consensus for much of 2018 has largely been expecting a total of three rate hikes, however firming inflation data, a sub 4% unemployment rate, strong corporate earnings, and future benefits of tax reform have combined led to an  increasing expectation for a fourth hike.  The probability for a fourth rate hike peaked at the 50% level in mid-May, but quickly pulled back to below 12% by month’s end following a temporary risk off period due largely to political risk in Europe.  Just as quickly the odds for a fourth hike have now rebounded to 40%+, as seen in the below chart.  Dovish forecasts are based on the flattening curve and troubles in select emerging markets with tightening dollar liquidity.  However the Fed’s primary mandate of inflation and employment are being met, economic activity is strong, and stocks are at/near record highs.  The greater concern may just be the risk of a future inflationary spike.  The one certainty is that there is a great deal of uncertainty. 

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Nasdaq's Market Intelligence Desk (MID) Team includes:

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information. 

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