- The FOMC meets this week; no move on rates expected
- Investors will be focused on the Fed’s efforts on the great unwind (reducing the size of its balance sheet)
- Other critically important measures of economic performance highlight the week: Philly Fed Business Outlook, Atlanta Fed Business inflation Expectations and Leading indicators
- Hurricane Jose turns towards the Northeastern United States
- Secretary of State Rex Tillerson insists that the U.S. approach to North Korea remains primarily focused on negotiation
- NFIB Small Business Optimism matches 12-year high (105.3)
- U.S. equities continue the run into record territory
WTI Crude Oil (Nymex) (CL=F) $49.71/bbl
Gold (Comex) (GC=F) $1,309.80/t. oz.
Volatility S&P 500 (^VIX) 10.12
Interest Rate 10-year note (CBOE) (^TYX) 2.23%
Still water runs deep
Last week’s economic data did little to act as a headwind for the rally in US equities — a rally that seems to defy gravity. Small Business Optimism (NFIB) logged a monthly reading of 105.3 for August, matching the 12-year high set in January of this year. The JOLTS Report, though backward looking, for July confirmed a tight job market coming in at 6.170M. On a somewhat modestly disappointing note, the PPI-FD reading for August underwhelmed. Bloomberg consensus was calling for 0.3%. The actual was 0.2%. Additionally, less volatile food and energy, the reading was a scant 0.1%. Clearly, inflation at the producer level remains mysteriously absent from the economic expansion.
That said, consumers did see an uptick in prices. The Consumer Price Index for the month reflected a rise to 0.4%, versus expectations that were calling for 0.3%. The CPI Y/Y change was 1.9% versus July 1.7%. Not at all surprising, given the early impact hurricane season, retail sales for August were weak, coming in at -0.2%. The Empire State Manufacturing Survey surprised to the upside again coming in at 24.4 for September and well above consensus range. Remember last month’s reading was a much stronger than expected 25.2. Easily the biggest disappointment of the week on the economic calendar came in the form of industrial production. August consensus was calling for 0.1%; it was -0.9%. The overall tempo and tone of last week’s economic calendar remains constructive, as has been the case for much of the last several months. However, it is not compelling enough, in my opinion, to warrant a move by the FOMC this week, particularly in light of the focus on balance sheet reduction.
All eyes on Fed Chair Yellen & Co.
Obviously, this week’s focus for investors will be the long awaited September FOMC Meeting Tuesday and the announcement, forecasts, and Chair Yellen’s press conference on Wednesday afternoon. As I have indicated, the most recent economic data does not appear to justify a move in rates this week. The market seems to agree. The closely watched 10-year yield remains relatively compressed at 2.23%. The CME Group puts the odds of a move by the Fed this week at nearly zero. However, the reading of that gauge for a move by the Fed in December jumps to 55.6%. Much of the timeline for a move will not only depend on economic data but also the degree to which our hurricane season has impacted economic performance and the degree to which balance sheet reduction, if it is in fact enacted, is expected to inform the landscape.
U.S. equities remain in a confirmed uptrend (though rangebound) heading into this week. The landscape remains remarkably volatility-free. And sector leadership is likely to shift to the financial sector as Q3 earnings season approaches in the coming weeks. That leadership in earnings is likely to be underscored by solid guidance. Recent economic data clearly provides for a constructive outlook. In my interview with Fred Katayama last week for Reuters Insider, I suggested that Apple (AAPL) is “affordable” given its valuation, earnings and prospects for additional consumer adoption in the coming months heading into holiday shopping season. I remain constructive and as I suggested, buying on the dips makes most sense. In the last nine trading days, Apple has only logged two days of gains.
Commentary by Sam Stovall, Chief Investment Strategist at CFRA
The S&P 500 (^GSPC, SPY) continues to confound skeptical investors, as it adds to its above-average number of new highs — 32 through September 12 (more than twice the annual average since 1945) — while enduring an anemic number of 1%+ volatility days — eight versus an average of 50 per year since WWII. During the 18 calendar years of above-average highs and below-average volatility, the S&P 500 recorded an average full-year gain of 18.3%, and rose in price 100% of the time. In addition, should the S&P 500 close September with a gain, it will be the 17th time since 1945 that the market was up in both August and September — its two most treacherous months. History then reminds us that subsequent to these consecutive monthly advances, the S&P 500 has gained an average 2.0% in the final three months of the year and rose 13 of 16 times, slipping less than 1.3% each in the final three months of 1983, 2007 and 2012.
Economic Calendar (all times Eastern):
FOMC Meeting Begins
8:30 a.m. Housing Starts
8:30 a.m. Current Account
8:30 a.m. Import and Export Prices
8:55 a.m. Redbook
7:00 a.m. MBA Mortgage Applications
10:00 a.m. Existing Home Sales
10:30 a.m. EIA Petroleum Status Report
2:00 a.m. FOMC Meeting Announcement
2:00 a.m. FOMC Forecasts
2:30 a.m. Fed Chair Press Conference
8:30 a.m. Weekly Jobless Claims
8:30 a.m. Philadelphia Fed Business Outlook Survey
9:00 a.m. FHFA House Price Index
9:45 a.m. Bloomberg Consumer Comfort Index
10:00 a.m. Leading Indicators
10:30 a.m. EIA Natural Gas Report
9:45 a.m. PMI Composite Flash
10:00 a.m. Atlanta Fed Business Inflation Expectations
1:00 a.m. Baker-Hughes Rig Count
John Williams, 6:00 a.m.
Esther George, 9:30 a.m.
Robert Kaplan, 1:30 a.m.