Stocks Under Pressure Amid Oil Losses, Growing Rate Hike Expectations

Oil prices slumped early Wednesday, and the stock market followed suit. Meanwhile, a Fed interest rate hike next month appears more likely than ever.

After rising to two-week highs Tuesday on renewed talk of a possible OPEC production freeze, oil prices fell more than 1% early Wednesday back toward $45 a barrel, hurt by the American Petroleum Institute’s (API) report of a 3.7 million-barrel rise in U.S. crude stockpiles last week. The official government inventory report comes later today. The energy sector is up about 3% over the last five sessions, and that, along with financials, had helped put a charge into stock indices.

As oil prices fell, a possible interest rate hike seemed to loom. St. Louis Fed President James Bullard said early Wednesday, “A single policy rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting,” according to The Wall Street Journal. Bullard told reporters his outlook for the economy hasn’t changed due to Donald Trump’s election victory. Odds of a December rate hike now stand at 90%, according to CME futures. Stocks have rallied over the last week even as rate hike odds zoomed higher, but the question is whether the stock market can continue climbing with chances of a rate hike seemingly baked in.

With Trump’s election now well behind, volatility has caved, with VIX falling back below $14 early Wednesday from highs of $22 right before the vote. A lower VIX means investors expect calmer times ahead, but it’s advisable to stay on the lookout for intra-day volatility, especially as Trump announces his cabinet picks and Fed Chair Janet Yellen prepares to testify to Congress on Thursday (see below).

In something of a surprise, the Producer Price Index (PPI) came in unchanged Wednesday, compared with Wall Street expectations for a 0.3% climb. Tomorrow brings the Consumer Price Index (CPI). Target Corporation TGT became the latest big company to top Wall Street’s consensus earnings expectations and raise guidance. In its press release, TGT noted “improvement in our traffic and sales trends,” and said it saw unexpectedly strong back-to-school sales. TGT shares rose 9% in pre-market trading. On the other side of the coin, Lowe's Companies, Inc. LOW

missed expectations on both earnings and revenue, and saw shares fall.

FIGURE 1: OLD HIGHS IN SIGHT. The S&P 500 (SPX), plotted through Tuesday on the TD Ameritrade thinkorswim® platform, is once again approaching the summer highs. Resistance could come in at around the 2190 level. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Listening to the Fed: A number of Fed speakers are out talking this week, highlighted by Fed Chair Janet Yellen’s scheduled appearance before Congress on Thursday. What should investors listen for besides any rate-related items? First, does the Fed see any increased inflation risk? There’s a lot of talk now about a more aggressive fiscal policy as the new administration comes in, and the bond market has taken a dive. What does this mean for inflation going forward? The Fed has talked about a desired 2% rate; could the rate environment lead to lots of inflation in a hurry? Also, do Fed officials agree with a growing number of economists who are raising their projections for gross domestic product (GDP) growth in the wake of Trump’s election? Some economists now expect GDP growth as high as 4% in the coming year.

Future Rate Hikes Contemplated: It’s worth noting that so-called “one and done” rate hikes like the one the Fed implemented last December are usually the exception, not the rule. The last time the Fed was in a rate hike regime, recall, was between 2004 and 2006, a period in which the Fed raised rates 17 straight times. No one is necessarily predicting that again, but the recent jump in Treasury yields, accompanied by talk of increased government spending, has once again raised inflation fears, and one of the Fed’s mandates is to keep inflation tame. Looking ahead, though, CME futures aren’t building in much chance for further rate hikes after December.

Data Coming in Strong: A number of signs seem to point toward improvement in the economy, with retail sales, New York Manufacturing and import and export prices all increasing more than expected, according to several economic reports released Tuesday. Tomorrow’s CPI data could offer insight as to whether the budding economic strength is starting to affect prices. Thursday also delivers some housing data, including housing starts and building permits. Wall Street consensus is for a jump in October housing starts to an annual rate of 1.17 million units, up from September’s 1.047 million, Briefing.com said. Of course, the October housing data won’t reflect current mortgage rates. We’ll have to wait until next month to see if there’s any impact on housing from that particular development.

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR. Source: Briefing.com