Market Overview

What Tidings From the Tetons? Long-Awaited Yellen Speech Today

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After a placid summer seldom interrupted by news of note, word comes down from Wyoming on Friday as Fed Chair Janet Yellen speaks. Speculation centers around what Yellen could say about potential rate hikes, especially the possible timing of such moves.

Yellen is scheduled to speak at 10 a.m. ET from the Fed’s annual Jackson Hole symposium, and her remarks come after this morning’s second estimate from the government on Q2 Gross Domestic Product (GDP). It’s unclear how much Yellen might discuss the economic picture, but GDP is a number the Fed typically watches closely.

The main thing many investors are looking for from Yellen is any clue about the odds of a September rate hike. As of Friday morning, the futures market predicted the likelihood of such a move at 24%, and volatility has gone up in recent days as stocks have come down, perhaps because of some hedging moves by investors in the event Yellen signals a near-term hike. Other Fed officials have recently taken a somewhat hawkish tone.

But generally, the Fed has been reluctant to tighten the money supply with economic growth running stubbornly below the historic norm despite extremely low interest rates, analysts say. The dovish wing of the Fed has argued that rates need to stay lower for longer to keep the economy from slowing further, especially with economies in Europe, China, and Japan struggling with issues of their own.

Hawks, on the other hand, have said rates need to gradually rise to put the U.S. economy back on a more normal footing and fend off any potential inflation that might loom in the wake of recent strong job and wage growth. The Fed last raised rates in December, and that was the first time in nearly a decade.

Where will Yellen land? It’s hard to say. Earlier this year, she joined in with other hawks and said gradual rate increases were needed. Immediately after that came a much poorer-than-expected May jobs report followed by the Brexit vote, followed by weaker than expected Q2 GDP. Since then, jobs growth has resumed in a big way, and durable goods orders and new home sales came in strong earlier this week. On the other hand, existing home sales and July retail sales weren’t as robust as analysts had expected. All this conflicting data puts Yellen in a very tough position as she prepares to speak.

There was talk in the market late Thursday that since the Fed’s symposium concerns a rather dry, academic topic, with the title, "Designing Resilient Monetary Policy Frameworks for the Future," Yellen’s speech may not touch on the economy that much at all, but instead could be more in line with the topic of the symposium. If Yellen doesn’t address the subject of interest rates, what would that mean? Some say that if she doesn’t raise the topic, it could signal less chance of a September rate rise, because she would want to give the market some advance notice if that might be in the cards. We shall see.

Going into the Yellen speech, stocks posted another down day on Thursday, the second in a row, and are right in the middle of their recent trading range. It’s now been nearly two months since the S&P 500 Index (SPX) moved up or down 1% or more, but health care stocks did fall nearly that much on Thursday amid continued controversy surrounding Mylan NV (NASDAQ: MYL), which remained under fire for raising the price of its EpiPen Auto-Injector, a medication and delivery system for people with severe allergies.

Other companies are also getting pulled in, with shares of pharmacy benefit manager Express Scripts Holding Company (NASDAQ: ESRX) dropping 6% on Thursday. Mylan, in attempts to defend itself from criticism, noted that companies serving as middle men between patients and pharmaceutical firms also reap profits from rising drug prices. That brought Express Scripts and CVS Health Corp (NYSE: CVS) under more scrutiny. CVS shares fell more than 3%.

Oil prices, which have been choppy lately, were about steady early Friday at $47.32 a barrel. Media reports early in the day suggested that Saudi Arabia, the largest oil producer, might be less interested in any potential freeze in production. Crude prices have fallen about 3% so far this week.

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Old Homes Less Shiny than New: Earlier this week, the government reported that U.S. new-home sales in July jumped 12.4% to their highest level in nearly eight years at a seasonally adjusted annual rate of 654,000. But July existing home sales, released Wednesday, didn’t shine as brightly, falling 3.2 percent and missing Wall Street’s expectations after four consecutive months of gains. Severely restrained inventory and the higher prices associated with the lack of available homes may have caused existing home sales to lose steam, the National Association of Realtors said.

Amgen Gets “Dear John” Letter From FDA: Getting a “complete response” to an application may sound like a good thing, but that’s not the case if the “complete response” letter is from the U.S. Food & Drug Administration (FDA) and the applicant is a drug company. This week, big biotech Amgen, Inc. (NASDAQ: AMGN) got the FDA’s equivalent of a “Dear John” letter from the agency in regards to AMGN’s application for approval of its Parsabiv drug for the treatment of secondary hyperparathyroidism in patients with chronic kidney disease on dialysis. Amgen said it’s reviewing the letter, but didn’t provide details about why the drug, which had done well in late-stage studies, didn’t get the FDA’s nod. That’s not surprising, as typically companies don’t share much, if any, of that kind of information. Some analysts said safety may have been an issue, but that was only speculation, not confirmed. Shares of AMGN fell slightly from recent highs, and the biotech sector as a whole remains a poor performer so far this year, down about 14%, according to S&P.

Are Shoppers Going More Upscale? Just as many investors follow Macy’s Inc. (NYSE: M) to see how high-end retailers are performing, they also keep an eye on companies like Dollar General Corp. (NYSE: DG) to get a sense of the lower end of the market. On Thursday, DG unveiled quarterly results that disappointed from a revenue standpoint, missing Wall Street expectations by $110 million. The weak DG results came after a generally solid series of earnings from most other major retailers, including Wal-Mart (WMT), which also caters to the discount buyer. Could DG’s disappointing sales signal the U.S. shopper moving more upscale? Maybe, or it could partly reflect the recent increase in gasoline prices from lows seen last winter, analysts said. For their part, DG executives, speaking on their conference call, said rising health care costs might have kept customers away.

 

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