Waiting on the Fed
The Quick Read:
- The stock market remains in a months-long "wait-and-see" mode on further direction from the Fed's 2017 rate hike agenda.
- The November OPEC meeting gives hope to crude oil prices. Consensus to cut production will be the key to any sustained rally.
- Strength in the US dollar continues as the UK implements its exit strategy from the European Union and increasing odds of a December rate hike.
- A divided Fed continues to assess the strength of the US economy amid continued domestic and global concerns.
SPX (S&P500)
The market is entering earnings season and looking to break a 5-quarter consecutive string of declining corporate earnings. So far earnings have been mixed. The SPX is roughly 2% off its all-time closing high of 2190.15, set on August 15, 2016, and the market has been in a “holding pattern” near this high since early summer. The market has been, and is still, seeking direction from a divided and sometimes contradictory Fed. The Fed wants to raise rates, but the speed and timing of these hikes has been a source of great conflict and confusion, even within its own Members. I expect a December rate hike, and absent a significant decline in the current economic environment, the Fed will get its wish. But the key element being assessed is the speed and quantity of future rate hikes in 2017 and beyond.
Crude Oil
Crude oil has, for the most part, been trading just above the $50-level for the past three weeks. The driver of this recent upswing was the three day OPEC meeting in Algiers from October 26-28, when OPEC announced an “understanding” among its members to cut future production. Crude popped 13% on this report- however, as I have previously mentioned, there are a ton of caveats and concerns as to the reality of this feel-good announcement. The details of this understanding are to be completed at the next OPEC meeting in Vienna on November 30. The key to success of this proposed production cut will be for OPEC to agree on which members must cut back on their own internal production and which members are free to produce crude oil at will. This lack of agreement has been the primary source of contention and why recent OPEC meetings failed to come to any agreement to help stabilize oil prices. Now, even before the November negotiations have begun, OPEC members Iraq, Libya, Nigeria, Iran and Venezuela are already demanding that they be exempt from any production cuts.
Fed Chatter
The next Fed meeting is November 1-2, but don’t expect any hike or controversial commentary before the November 8 Presidential election. I expect a hike at the December 13-14 meeting, and the December odds, once 50/50 a month ago, have now increased to around 75%. Within the past month the latest GDP, employment and CPI (inflation) numbers have been released. Though none of these reported numbers were considered “poor,” they were also not considered “great.” However, the financial markets realize having these key economic indicators simply be “good enough” will be sufficient for the Fed to continue
on with its internal rate hike agenda. The Fed wants to raise rates, and “good enough” will provide enough cover for an expected rate hike in December.
US Dollar
The USD has been gradually gaining strength this past month. Late last month, UK Prime Minister Theresa May set off a selling frenzy in the British Pound as she set a March deadline to begin the UK exit from the European Union. More significant than the March exit date was the fact that the UK would undertake a “hard exit”- prioritizing immigration policies over the continued fluidity of existing trade agreements. The sell-off in the Pound spurred a flight to safety in the form of the USD. On the domestic front, the increasing odds of a December rate hike also helped propel the USD. Higher interest rates typically result in increased demand for the currency, as global investors seek higher yields.
Looking Ahead
Key monthly updates to Personal Income and Outlays and the ISM Manufacturing Index and ISM Non-Manufacturing Index are released next week. The November FOMC Meeting is on Wednesday, but October’s monthly Employment numbers released next Friday the 4th will be highly anticipated.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
