For the mid-week ending November 11, 2015, the Dow and S&P 500 continue to decline as the probability of a December rate hike increases. In other news: San Francisco Fed Williams says December rate hike is likely; mortgage applications fall amid sharp jump in rates; and, the IMF says the global economy faces persistently weak growth.
The markets slip again, along with oil prices on Veterans Day. The Dow dropped -0.3 percent (56 points) to 17702.22; the S&P 500 dropped -0.3 percent (6.7 points) to 2075. Energy stocks fell as oil prices dropped -2.9 percent to $42.93 per barrel. After Friday’s strong jobs report, the Dow and S&P 500 pulled back as the probability of a December rate hike increased to 70 percent. The pull back is occurring near the top of the range for both indexes. The VIX, a measure of market sentiment, increased 5 percent to 16.06.
San Francisco Federal Reserve President John Williams, a moderate dove, said Tuesday in an interview with USA TODAY that there is a “very strong case” for a December rate hike. A rate increase has not occurred in nearly ten years; it has been at zero since the 2008 financial crisis. For some Fed policymakers, a weak global economy and still-fragile U.S. economy supports a rate hike delay till 2016. However, an unemployment rate at a near-normal 5 percent, and continuing strong growth in jobs supports a December rate hike; the only consideration now is the very low level of inflation.
A big jump in mortgage interest rates led to a small drop in mortgage applications. The volume of applications (seasonally adjusted) dropped -1.3 percent from the prior week, according to the Mortgage Bankers Association. The average 30-year fixed rate is 4.12 percent (from 4.01 percent), the highest level since August. Refinance applications fell 2.0 percent, but still remains up 4.0 percent from one year ago. Home buying has declined over the last few months following a strong spring, due to high home prices and high rentals; the combination of the two makes it more difficult for first-time buyers (who are the most active in the fall) to participate in the housing recovery.
The global economy faces “sub-par growth” says the International Monetary Fund (IMF). Growth prospects for the global economy have been repeatedly marked down over the last five years amid high levels of poverty and unemployment. Real GDP is now averaging 3.1 percent year-on-year in 2015 (vs. 3.3 percent prior), and 3.6 percent in 2016 (vs. 3.8 percent prior). The three biggest risks to global growth are: the normalization of U.S. monetary policy (the rate hike); the slump in commodity prices; and, the continuing slowdown in China’s economy. Growth in emerging economies has been slowing for five years, with Russia declining -3.8 percent this year, and Brazil declining -3.0 percent. Moody’s Investors Service this month has warned that downside risks to the global economy has increased; and, Germany’s Ifo Institute said its index tracking the global economy has dropped to 89.6 (down from 95.9) in the third quarter.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 2025 and 2126 (2 standard deviations) by this Friday.
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