by Eli Wright
It’s been just about a year since the Fed’s last rate hike on December 16, 2015. Consumer sentiment is bullish, the labor market is strengthening with unemployment holding steady at 4.6% and jobs increasing, albeit at a slower than hoped for pace; and the U.S.'s most recent quarterly GDP report came in better than expected, though signs of an uptick in inflation have begun to appear including the most recent moves in the price of oil.
At the same time, US markets have been climbing to record highs. All of which sets the table for an expected rate hike of 25 base points. And since the hike is largely priced into everyone's expectations, it's not the hike but what will occur after today’s Fed announcement that will likely drive markets. Traders could rapidly move into profit-taking mode if the Fed doesn't provide clarity regarding what happens next, which could potentially wreak havoc on the USD and equities markets, especially US markets which are hovering at all-time highs.
Another event to watch today is President-elect Trump’s meeting with hi-tech CEOs, a group that rather visibly didn't support his campaign over the past year.
In Asia overnight, activity was mostly weak; many traders remained subdued ahead of the Fed decision, not wanting to risk a negative surprise. The Nikkei edged up 0.02% to 19,253.61, even though yesterday’s Tankan manufacturing sentiment indicated that the weaker yen has boosted Japan’s economy, providing an optimistic outlook for the coming year. The Hang Seng eked out a 0.04% gain, closing at 22,456. In China, the Shanghai Composite fell 0.48%, to 3,139.92.
In Europe, markets are skittish in front of the Fed: the FTSE is down 0.13% to 6,959.30; the DAX is down 0.21% to 11,262.25. The Stoxx 50 down 0.46% to 3,224.50.
On Wall Street yesterday, buyers took the lead once again; consequently the major indices rose to all-time highs. The Dow increased 0.58%, to 19,911.21 just a hair away from the much anticipated 20K; the S&P 500 closed 0.65% higher, at 2,271.72; and the NASDAQ went up nearly 1%, to close at 5,463.83. Small caps missed out on the exuberance, as the Russell 2000 fell 0.04%, to 1,374.61.
In pre-market trade, indices are mixed: the S&P 500 and Dow are down slightly, 0.04% and 0.08% respectively; the NASDAQ is up a hair, 0.05%
With the Fed decision just hours away, could we be seeing the final moments of the current “Trump Stock Market Bubble?”
It doesn’t look like anything will slow the Dow right now, at least until it reaches that vaunted 20,000 mark. Trading volumes for more than a week have been almost double the usual, with bulls appearing laser-focused on reaching that benchmark threshold, no matter what. The S&P and NASDAQ could ride the tailwinds of this event. However, a drop in US yields, or any focus on government regulation could drive equities lower.
The US 2-year yield rose to a six-year high yesterday, to 1.166%. The 10-year note is at 2.442% and 30-year yield is 3.1%
Forex
As of this writing the Dollar Index is slightly down against a trade-weighted basket of currencies, at 101.03. The Canadian dollar in particular strengthened to fresh, seven-week highs against the greenback yesterday, boosted by higher oil prices.
Where the dollar goes after today is an open question. If the Fed issues a larger-than-expected rate hike of 50 bp, the greenback will rise. If the Fed surprises completely and stands pat, the dollar will certainly fall.
Following the Fed’s immediate decision, markets will wait to hear what the Fed is thinking long-term. If Chair Janet Yellen’s comments remain vague regarding the future, the dollar will suffer. And though it may be entirely logical to expect a lengthy pause before the next hike—in order to see what Trump does once he takes office, how bond yields expand, and what happens to the dollar—confirmation that the next hike might be a while away will likely disappoint dollar bulls and send the Dollar Index lower.
In September, the majority of FOMC members saw rates just above 1.1% by the end of 2017, which would have meant just over one rate hike for the entire year. But that was before the unexpected US election result. If the Fed’s guidance today projects the need for two or three follow-up rate hikes in 2017 (the first one likely in June), that could give traders just the fuel they need to drive a dollar bounce.
Watch too for any indication of a Fed-Trump clash regarding loosening banking regulations. Yellen's comments on this issue along with any Trump tweets in response, could shed light on where the banking sector in particular heads next.
Commodities
Gold fell yesterday, but is up 0.4% as of this morning, trading at $1,163. Since the beginning of November the precious metal has been headed down. Bearish sentiment is unlikely to change unless the dollar does something totally unexpected today.
Silver, which was covered more extensively yesterday, is also up this morning, to $17.112. As we said in yesterday's article, the white metal is struggling to climb out of its 6-year downtrend, but could approach $18.
Oil prices are down this morning following a reported rise in U.S. crude inventories and an estimate that OPEC may have produced 500,000 bpd more in November than was previously thought. Despite this information, the International Energy Agency maintains that due to demand increases, there could be a supply shortfall of 600,000 bp day in early 2017 if producers stick to their output reduction plans.
As of this writing, brent is down 0.81%, to $55.26, while crude has lost more than 1%, down to $52.44.
Stocks
Along with the Fed and the approaching Dow 20K target, there is one additional equities-related event today that could impact markets, especially the tech industry. President-elect Donald Trump will meet with high-tech royalty—key executives from the US's top tech companies later this afternoon. This event, coordinated by Trump supporter and PayPal (NASDAQ:PYPL) founder Peter Thiel, should likely foster discussion of job creation and the repatriation of the companies' collective hundreds of billions of dollars in offshore cash at a beneficial tax rate.
Attendees include:
- Elon Musk of Tesla (NASDAQ:TSLA)
- Larry Page and Eric Schmidt of Alphabet (NASDAQ:GOOGL)
- Tim Cook of Apple (NASDAQ:AAPL)
- Satya Nadella of Microsoft (NASDAQ:MSFT)
- Jeff Bezos of Amazon (NASDAQ:AMZN)
- Sheryl Sandberg of Facebook (NASDAQ:FB)
- Safra Catz of Oracle (NYSE:ORCL)
- Brian Krzanich of Intel (NASDAQ:INTC)
- Chuck Robbins of Cisco (NASDAQ:CSCO)
- Ginni Rometty of IBM (NYSE:IBM)
Shares of virtually all of those companies closed higher yesterday, as the tech industry as a whole performed well, up 1.21% yesterday, compared to 0.65% for the overall S&P.
Source: Fidelity.com