onday was an up and down day for US markets, but the big takeaway has been that the big sea change and realignment in around how the street reacts to FOMC and economic news continues.
To recap, since 2009, generally speaking, news that pointed toward a dovish and supportive Fed has been received positively by stock traders. On Friday, however, a dovish read on the FOMC decision to delay raising interest rates sparked a big selloff in stocks and oil.
In other words, up until recently, bulls and doves were allied along with bears and hawks. Friday’s selloff showed that the bears have switched sides and are now aligned with doves, while today’s action confirmed this with bulls aligning with hawks.
The reason for this is that many traders now recognize the US economy has reached a point where the economy can stand on its own two feet again and it's time to start easing back on emergency measures, or risk causing more problems. In addition, the negative signalling effect I warned about before the meeting has kicked in. That is: knowing the Fed should start raising rates, the delay has caused many traders to ask what is wrong with the global economy. Because of this, instead of being supportive as in the past, Fed inaction has become a sign of potential trouble.
Today’s trading confirms the tide has turned with US stocks responding favourable to hawkish talk from the Fed.
Over the weekend:
San Francisco Fed President Williams (who voted the party line last week) indicated the decision to hold was a close call. He supports a rate hike this year, echoed FOMC Chair Yellen’s comments that a press conference could be called on short notice on an October liftoff, and warned against waiting too long.
Richmond Fed President Lacker (hawkish dissenter last week) confirmed he things rock bottom rates are no longer needed.
St. Louis Fed President Bullard (non-voter this year) indicated he would have dissented if he had a vote, and that conditions to normalization have been met.
Hawkish comments continued from the Fed on Monday:
Perhaps most importantly, Bullard went on CNBC took the ultra-doves to task apparently calling out CNBC host Jim Cramer and stating ““The Fed cannot permanently raise stock prices” and “To have him cheerleading for low rates 24 hours a day is, I think unsavoury” he also confirmed the Fed wants to move on rates early and gradually and avoid falling behind the curve and having to raise rates every meeting as it did in its 2004-2006 campaign.
Also, after negative comments from Democratic Presidential candidate about drug companies sent stocks into reverse, they regained their footing and rallied after Atlanta Fed President Lockhart started speaking at 1:00. He voted the party line to hold last week but indicated today that he expects interest rates to rise this year, noting that he held off due to recent market volatility but that as things settle down he remains ready to start raising rates. He also indicated that last week’s decision was a close call.
Overall, the Fed comments and warnings from the weekend and on into Monday can be seen as strong signals that the Fed is seriously considering an October liftoff with December as a backup date. Markets appear to be pleased with hawkish talk as stocks, USD and WTI have all been climbing to start the week.
FOMC Chair Yellen is scheduled to speak again later this week which could spark another round of Fed speculation trading. Traders should note that things have changed with hawkish talk and strong data is now being seen as a sign of strong economy and a positive environment for resource demand and corporate earnings. This is a huge change in how the market reacts to Fed related developments for the prevailing wisdom of the last several years.
Crude oil has responded to the hawkish Fedspeak today in the same manner as stocks, climbing as hawkish news shored up confidence in the prospects for resource demand. Copper has also been trading slightly higher.
On the other hand, gold has dropped back with USD on the rebound. The greenback has outperformed other majors today with NZD, SEK and EUR getting hit the hardest while CHF, CAD and BGP have fallen the least. AUD has been in the middle of the pack ahead of today’s housing data.
There’s not much on the economic calendar today, so speculation on what the Fed may do and what’s happening in China could dominate trading. Chinese stocks and indices have been base building lately. Yesterday’s China Beige Book seems to have confirmed the stabilization in sentiment, indicating that the economy is not as dire as some people have been thinking, particularly with the service sector improving.
We may also see some positioning ahead of tomorrow’s flash PMI reports, the first indication of how China, Japan and other major economies are performing in September so far.
There have been no major announcements after the US close today.
Significant announcements released overnight include:
US existing home sales 5.31M vs street 5.50M
Canada wholesale trade 0.0% vs street 0.8%
Germany producer prices (1.7%) vs street (1.6%)
Upcoming significant announcements include:
11:30 am AEST Australia Q2 house prices street 8.0% vs previous 6.9%
11:00 am BST UK CBI total orders street 0
11:00 am BST US CBI selling prices street (5)
12:00 pm BST Turkey interest rate 10.75% no change expected
1:00 pm BST Hungary interest rate 1.35% no change expected
9:00 am EDT US consumer confidence street 0.4%
10:00 am EDT US Richmond Fed street 2
6:30 pm EDT US Atlanta Fed President Lockhart speaking
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