After Pause In Rally, Market Awaits Observations From Yellen, Other Fed Speakers

It’s Fed day again, in a sense.

Fed Chair Janet Yellen and others are scheduled to share their thoughts Friday, meaning we may enter the weekend with a better sense of the Fed’s position on rate hikes. Stocks fell in pre-market trading, extending yesterday’s moderate losses, and European stocks were also lower.

While there’s little in the way of economic data today, a full slate of Fed speakers could keep things jumping. Chicago Fed President Charles Evans, Richmond Fed President Jeffrey Lacker, Fed Governor Jerome Powell and Fed Vice Chairman Stanley Fischer are all scheduled to deliver remarks between now and midday. And to top things off, Fed Chair Janet Yellen gives a talk on the economic outlook at 1 p.m. ET.

These speeches represent the last observations investors will hear from Yellen and company before the Fed’s March 14-15 meeting, as the Fed’s pre-meeting silent period goes into effect after today. As of Friday morning, CME futures showed 75% odds of a rate hike at the meeting, a huge jump from earlier this week. Recent Fed speeches sounded quite hawkish, so let’s see if today’s remarks continue in the same vein.

It looks like many investors took money off the table Thursday after Wednesday’s big rally. That’s not too surprising, as profit taking often follows these sharp upward moves. Plenty of positive sentiment appears to remain in the markets, meaning we shouldn’t necessarily see Thursday’s sell-off as an indication of any fundamental change in market psychology. One of the most interesting things yesterday was that even though stocks fell, the VIX fell 6%. The message there? Maybe market participants aren’t too worried.

The financial sector, which shined brightest on Wednesday, proved the weakest on Thursday, giving up about half of Wednesday’s gain and falling nearly 1.5%. Still, the sector is up more than 24% since the November election, so one bad day isn’t too surprising.

As stocks fell, so did bonds, with yields continuing their upward track based on rising odds of a Fed rate hike later this month as indicated by the futures market. Ten-year yields were little changed early Friday at 2.49%, near the top of the recent range.

Oil popped up a bit Friday after falling to three-week lows Thursday amid signs that Russia hasn’t been cutting production as much as expected, news reports said. Also, U.S. oil supplies climbed again this week to new record highs, according to the Energy Information Administration (EIA). Oil remains range-bound between $50 and $55 a barrel (see below). Oil market watchers may want to pay attention to Friday’s weekly Baker Hughes oil rig count, which has been steadily rising over the last months. U.S. oil production recently rose back above 9 million barrels a day, not far off historic highs.

It may seem strange not to have a jobs report on the first Friday of the month (see below), but that’s coming next Friday. Data is otherwise rather light.

Where is the Jobs Report?

Many investors eagerly await the first Friday of each month for the monthly non-farm payrolls report. But they have to wait an extra week this month. Why? Because the Bureau of Labor Statistics (BLS), in its survey, uses the week of the 12^th in its reference, and needs about three weeks after the reference week to complete the report. So if the 12^th is on a Sunday in February, the shortest month of the year, the BLS won’t have enough time to get its report done by the first Friday of the month. It happens once in a blue moon, and that’s the case this month.

Past isn’t Prologue, But

We always remind investors that history doesn’t necessarily repeat itself in the markets. Nevertheless, CFRA put out some interesting historical research Thursday that’s worth at least a look. The S&P 500 (SPX) jumped 3.7% in February after rising 1.8% in January. In the 27 years since 1945 that the SPX rose in both months, the SPX recorded a positive full-year total return 27 times, averaging 24%, CFRA said in a research note. In addition, the SPX rose in 25 of 27 years during the remaining 10 months, declining in 1987 and 2011. Come back in a year and see if the pattern held true for 2017.

Looking for Volatility? It’s Not in Oil

The CBOE’s OVX, which measures oil market volatility, recently traded at around 25, the lowest since October 2014 and down from above 60 a year ago. This low volatility corresponds with a period in which front-month crude oil futures continue to trade within a narrow range between $50 and $55 a barrel. It seems like every time OPEC cuts back production, U.S. production and inventories rise. That was the case again this week, and that’s keeping oil pretty range-bound. This may have effects beyond the oil market itself. Lack of volatility in oil may be contributing to lack of volatility in equities. High oil volatility early last year corresponded with a high VIX as plunging oil prices contributed to worries about the economy, which the stock market reflected in a big sell-off. While correlation isn’t necessarily causation, it seems like a good chance that the current bland oil market could be helping equities simply by staying out of the way.