Watching the Regional Fed Presidents
Monday was an extremely quiet session as the S&P 500 traded in the second narrowest intraday range of 2016. It also happened to be the lightest volume trading session since last Christmas as investors were clearly focused elsewhere. There was no major domestic economic news to digest. Investors did have some global data from both Japan and Europe to break down. In Japan, exports fell a staggering 10.1% on a year over year basis as a rapidly appreciating Japanese Yen hurt the competitiveness of Japan’s goods. Toyota Motors mentioned in their recent earnings call that an appreciating Yen would cause profits to fall for the balance of 2016.
Elsewhere, manufacturing growth in Europe slowed sequentially. Manufacturing did manage to expand across the Eurozone as a whole. The quiet data translated into little movement for the S&P 500 as the index traded near unchanged almost all day until weakening modestly into the close. The key benchmark closed the day with a loss of -0.21% to finish at 2048.84. The advance/decline margin saw almost an equal number of stocks rise and fall on the NYSE. New highs managed to outpace new lows by a narrow margin. Individual sector performance saw more red than green at the close. The basic materials and technology sectors were the only S&P 500 subsectors to end the day with gains. Meanwhile utilities and energy lagged the broad markets on Monday. No individual sector saw outsized volatility. Commodities were influenced by the strong dollar and finished the day mostly lower. Bonds performed similarly to stocks, experiencing marginal fluctuation but managed to close slightly higher on the day. The best performing segment of the bond market was longer dated treasuries as interest rates did inch lower.
Although the economic calendar is relatively light this week there are plenty of speeches scheduled by various members of the Federal Reserve. Last week, when the minutes were released from the April meeting market participants began to grow concerned that we could see a hike as early as June. Since then, the regional Fed Presidents have stepped up their jawboning attempting to justify the minutes by making their case for a June rate hike.
Yesterday, San Francisco President John Williams, who is generally viewed as someone with close viewpoints to Janet Yellen because of their ties at the San Francisco Fed, said the Fed is seriously weighing a June hike. Williams has been making the case for three to four rate hikes in the U.S. since 2016 began. He went onto say, “I think the economy could withstand a rate hike. A 25 basis point increase in short term interest rates alone doesn’t have that big of an impact on the economy. In terms of whether we should do that, I think it’s a balancing act.” Williams did hedge his statement by suggesting we’re going to get a lot of data between now and the June meeting, but does view June as a live meeting. While Williams is viewed as a key member of the Federal Reserve, it’s important to recognize the game the Fed has been playing since they hiked rates last December. Just about every regional Fed President has been making the case for numerous rate hikes in 2016. Meanwhile, Janet Yellen has been virtually silent with the exception of press conferences following Fed announcements and planned speeches to the house and senate economic committees. In each of those testimonies or speeches, Yellen has remained accommodative, suggesting that as long as economic growth remains sluggish the Fed will remain supportive. Until Yellen pivots her stance, or we see some form of sustained long term pickup in economic growth it’s highly unlikely the Fed jeopardizes the current situation. The fact of the matter is that the rate of growth in the first quarter does not justify an interest rate hike. Although we have seen some economic data improve, specifically last week’s Chicago Fed National Activity Index, these readings are not at levels that would justify a rate hike. The Fed is trying to maintain a balancing act so that when the time does come to hike rates, the regional Fed Presidents won’t have to shift their stance to surprise markets.
Markets are poised to reverse yesterday afternoon’s late weakness and gap higher this morning on the back of a strong German GDP report for the largest economy in the Eurozone. German GDP growth in the first quarter came in at an annualized pace of 2.7%. This was more than double the rate of growth in the 4th quarter of 2015. We saw solid growth in German domestic investment, but the key driver of German growth rates continues to be exports which grew 1.00% from the preceding period. Trading in Asia was not nearly as positive as trading in Europe with almost all key indices lower. Most of the relevant market moving economic data is scheduled for release after the opening bell with New Home Sales and the Richmond Fed Manufacturing Index set to come out at 10:00am. New home sales will be important to watch as this directly translate into housing growth in the GDP report. With housing inventory levels on the low end of the historical range, new home sales will need to pick up in order for the housing market to accelerate and turn over more volume. We’ll continue to watch and monitor speeches and comments from the members of the Fed as they come out over the course of this week. On the whole the story of the market hasn’t changed. Dips and weakness continues to be bought but upside is hard to come by without earnings growth.