Well, here we are again, the FOMC meeting starts today and concludes tomorrow. In about 24 hours we will once again find out the fate of interest rates and their future direction. Many investors will likely be disappointed to hear there is no rate hike or the Fed is still in this data dependency mode. I have gone through numerous times why it is unlikely we see a rate hike in 2016.
In fact, the economic picture continues to deteriorate here in the US. The latest GDPNow figures released this morning by the Atlanta Fed showed 3Q GDP is now trending at around 2.9%, down from 3% on September 15th.
(Source Data From Atlanta Fed)
My expectation is that the market will likely be confused upon first receiving the news of the Fed Action. They will probably parse each sentence looking for the clues to help them decipher the Fed cryptic speak. Does this language allude to future Fed policy? We shall wait and see.
Do not forget that we also have the BOJ meeting completing tomorrow as well, which means we will find out what they decided to do in the middle of the night. We have spoken about this idea that the JGB yield curve is suggesting the BOJ may just do something to try and steepen the curve further, seeking to drive the shorter end of the curve lower while pushing the long-end of the curve higher.
So why do we care about all of this? Because this is the stuff financial markets live for and will likely drive the markets higher or lower into year-end.
The possible setup we see happening which would be a Fed in-action and BOJ action could yield results that would be bullish for equity prices. However, with nothing happening today, it leaves the market in a vacuum where the machines can rule the land.
The S&P 500 (NYSEARCA:SPY) is up some 25bps today, however, it has essentially gone nowhere since the 15th.
We can see from the chart above the S&P has mostly been capped at 2150 for the past few days. Additionally, we bottomed three times at 2120 and are now trending nicely higher. However, the machines are in control, selling the market off at 2150 while lifting it higher along that green trendline. With no real news flow and nothing for traders to fear they are letting the machine run the show today.
We are continuing to see biotech (NASDAQ:IBB) lead the market higher again today, up nearly 1.5%. Since we called the biotech breakout on July 20th, the ETF has rallied from about $272 all the way to $300 on two occasions. Today we sit at $295 and seem to be on our way to the $300 level once again. A break of this $300 level on the third trip would likely send the ETF to about $320 and the individual names within the group higher with it as well.
The staples are the second best performing group, up 50bps today.
Staples (NYSEARCA:XLP) have come under pressure recently due to the fear of a Fed rate hike this September. Remember the names in the group tend to have higher yields which mean a rate hike would send yields even higher, which in turn pushes stock prices lower. However, if we get a no-action from the Fed and no change in language, this would likely mean the group has been oversold and we should see a return to that $55 range before the last two week's volatility.
Yields And Currency
The Dollar is mixed in trading today but more importantly is strengthening considerably against the Pound (NYSEARCA:FXB). Once the Pound broke the psychologically significant 1.30 level vs. the Dollar level, you can see what happened.
The machines kicked in and took the Pound all the way to 1.2950 level vs. the Dollar. The pound is likely to see the Brexit lows in the not too distant future, which of course would be a positive for British multinationals and exporters.
We continue to watch the 10-year with a rate hike unlikely in our opinion we could see the 10-year (NYSEARCA:TLT) trade back to the 1.60% level.
However, the 10-year has clearly, broken out of its post-December rate hike bull run and appears to have reversed to a higher yielding course. If the 10-year does not break below this new found higher-yield trend line then be very careful. This could be a trap for high-yielding equities. Even though the Fed doesn't raise rates it does not mean we can't see yields back up to 2% on the 10-year. Remember rates were at 2.25% in December.
With the FOMC and BOJ meetings concluding tomorrow the markets have some room to play today, and we can see that they are. The S&P 500 just continues to flip-flop between positive and negative over the last few days trading seems to be more automated than anything at this point. For now, the machines are in control.
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Have A Great Day
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.