Flat Affect: Markets Tread Water With Fed, Other Central Bank Meetings Ahead

As central banks around the world prepare for meetings later this week, it wouldn’t be too surprising if the markets act a bit like old soda the next couple days. In a word, flat.

That’s how they’re looking early Monday, with European and Asian markets hardly moving and U.S. stocks also pointing toward a tepid kind of day. Things could change if new headlines roll in, but at this point, focus seems squarely on the Fed meeting starting tomorrow, and to a much lesser extent on the Bank of England and Bank of Japan later this week.

There’s not even all that much data to crunch today after the host of numbers in early June. Things perk up a bit with May housing starts and building permits tomorrow. Analysts expect both to climb after an uptick in April, according to Briefing.com.

At the start of the week, the futures market points to about 20% odds of a rate cut by the Fed at its meeting. Odds are higher for a move in July, futures prices indicate, but the language in this week’s statement, “dot plot,” and press conference are likely to give investors some insight into what the Fed might be thinking.

Fed Might Be Running Short of the “P” Word

The Fed’s “patience” might be running out. That’s what some economists are saying ahead of the Federal Open Market Committee (FOMC) meeting scheduled for Tuesday and Wednesday.

Since the last rate hike back in December, it’s hard to remember even one Fed statement or speech where the word “patience” didn’t work itself in. The Fed said it would be data-driven, and as recently as last month strongly implied not to expect any further rate moves either down or up anytime soon.

That seems to be changing quickly as economies both at home and overseas appear to slow. Economists quoted late last week by CNBC said they expect the Fed to potentially remove the “P” word from its statement Wednesday, and for the Fed’s so-called “dot plot”—which provides a map showing where Fed officials expect rates to go in the coming months and years—to show more of a tilt toward easier policy than the prior one from March. The dot plot is likely to get a close look from investors trying to get a sense of where the Fed sees rates headed not just this year, but in 2020 and 2021 as well.

What’s not widely expected is a rate cut at this meeting. Chances of that, according to CME Group futures, were around one in five as of early Monday, down a bit from late last week. Typically, though not always, odds this low so close to the meeting tend to be correct.

Chances for at least a 25-basis point cut rise to around 85% for the July meeting, according to futures prices. That said, the fundamental picture could change quickly between now and late July, so it’s probably not wise to pencil in a definite move. Also, it might be worth considering how markets might react if the Fed doesn’t sound as accommodative as many investors hope on Wednesday. This kind of scenario could push stock prices lower, some economists warn.

We’ll talk more about the Fed meeting both tomorrow and Wednesday, and have a quick recap of the Fed decision and statement on Wednesday afternoon. Stay tuned.

Witching Week

Later this week, on Friday, comes quadruple witching. That’s when stock options expire, along with stock index futures, stock index options and single-stock futures. Normally, a lot of ink gets spilled warning investors to be careful around quadruple witching, as it can cause increased volatility. However, some studies show there’s generally more volatility in the days leading up to quadruple witching and less on the actual quadruple witching day itself.

Either way, we’re approaching the end of the quarter, and that in and of itself can bring some volatility and choppy trading. 

From a sector standpoint, some of the top-performing ones since a month ago are “defensive” ones like Utilities, Real Estate, Staples, and Health Care. Standing out from that crowd is Materials, which are surprisingly strong since mid-May despite the trade battle that seems like it might be a restraining force. 

Materials’ solid gains over the last month could speak to underlying economic health, especially when you consider some of the sub-sectors Materials cover including construction, chemical, and container and packaging companies. Those are among the building blocks of modern global business.

Can Market Build on Two-Straight Weeks of Gains?

The old week saw gains for the second week in a row, with the S&P 500 (SPX) up about 0.5% over the five sessions. However, semiconductor stocks and some other Tech names, including Apple Inc AAPL, came under pressure by Friday. Semis got hurt by Broadcom Inc’s AVGO decision to cut its forecast in response to the U.S./China trade war.

Transports also fell Friday but gained ground over the course of the week. That sector is sometimes seen as a bit of a barometer for economic health.

Technically, it seems like 2900 remains a tough resistance point for the S&P 500 Index (SPX), but the 50-day moving average of 2874 didn’t really get tested too hard on recent down days, either. That’s a pretty tight range.

The old week ended with no real sign of any major recovery in 10-year Treasury yields, which stayed near recent long-term lows near 2.08% by late Friday before inching up to around 2.10% early Monday. The continued softness in yields after a brief up-turn at mid-week suggests there’s still a risk-off appetite among some investors.

Retail sales were the big data point late last week, rising 0.5% for May, a bit under Wall Street’s expectations. However, some investors cheered the government’s upward revision for April retail sales. The new week features building permits and housing starts for May (as mentioned above) and existing home sales for May on Friday.

The U.S. dollar index might be worth watching, too, as the week goes on. The dollar ended on a strong note Friday well above 97 despite falling Treasury yields. It had fallen below 97 earlier in the week. This looks like a bit of a discrepancy, because anticipated lower yields usually mean cheaper borrowing costs and more potential for inflation, all of which typically would weigh on the dollar. However, analysts say it appears weak data overseas might be propping up the greenback. It’s apparently one of those situations where investors flock toward the “best house on the block” when tough times come.

While the U.S. economy continues to look stronger in some ways than Europe and China, analysts do see earnings growth and the economy decelerating amid trade uncertainty. The Atlanta Fed’s GDP Now site raised its estimate for Q2 U.S. gross domestic product growth to 2%, but that’s still below the most recent Q1 government estimate of 3.1%.

The earnings calendar is light this week, but includes Oracle Corporation ORCL on Wednesday and Kroger (KR) on Thursday.


Figure 1: 14-CARAT-HIGH: Gold (candlestick) hit a 14-month (or should we say 14-carat?) high on Friday, getting a lift in part from geopolitical concerns as the U.S. and Iran butted heads over shipping attacks in the Persian Gulf. The dollar (purple line), which often is weak when gold is solid, also held its ground. That could be a sign that some investors continue to be on the defensive. Data Sources: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Many Meetings: This week’s Fed meeting hogs the front page, but two additional potentially market-moving meetings loom before the end of the month. There’s the G20 meeting on June 28-29 in Japan, and before that the OPEC meeting in Vienna on June 25-26. These two meetings—perhaps even more than the Fed gathering—could put a major exclamation point on June and help determine where markets go in July. Some analysts even argue that one reason the Fed isn’t widely expected to change rates in June is because Fed officials might want to wait and see what comes out of the G20 before making a move.

President Trump has said he plans to meet Chinese President Xi at the G20 meeting, but so far there’s been no confirmation of that from China. Even a statement from China that such a one-on-one might take place could conceivably help revive market spirits that flagged a bit after the early June rally. However, trade experts quoted in the media say it’s very unlikely Trump and Xi would be able to hammer out any sort of tariff agreement on the sidelines of G20. Instead, it might just reset the menu and maybe put together a framework for more talks. It looks like there’s still a long road ahead, and that could mean more range-bound trade going into earnings season next month.

On to Vienna: The OPEC meeting comes after the organization canceled a previously scheduled one in April. Things haven’t really gone OPEC’s way since then, with crude down about 15% from its April highs even with the little blip last week amid tensions between Iran and the U.S.

As OPEC prepares to meet, its members’ production has fallen to five-year lows below 30 million barrels a day, the cartel recently said. OPEC has been restraining production over the last two-and-a-half years in an effort to support prices, but it arguably hasn’t worked. Crude continues to sputter along at around $52 a barrel in the U.S., basically flat compared with where it was in January 2017 when the OPEC cuts first took effect. Analysts think OPEC is likely to keep those cuts in place at the meeting, especially considering its recent statement noting a slide in world demand growth and higher non-OPEC production. The question, as we often see with OPEC, is whether its many members can hold themselves to the lower production much longer considering many of them—notably Iran and Venezuela—face economic struggles. 

Where Next, Energy?: Weak crude, as we mentioned last week, could be helpful for transit stocks like airlines, but generally hurts Energy stocks. Looking ahead, some analysts are divided on how Q2 earnings might come in for Energy companies. The Energy sector is expected to see earnings per share fall about 0.4%, according to research by S&P Global Intelligence. However, FactSet sees EPS growing 2.7% for the sector, led by strength in sub-sectors like Oil and Gas Drilling and Oil and Gas Storage and Transportation. Ironically, despite FactSet ramping up its earnings expectations for Energy, the sector is the second-worst performer from a price standpoint of all 11 S&P 500 sectors so far this year, up 5.5%. Only Health Care has done worse.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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Posted In: EarningsNewsFuturesGlobalFederal ReserveMarketsGeneralcentral bankTDAmeritradeUS-China Trade War
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