For the mid-week ending October 14, 2015, the S&P 500 is pulling back after testing the high end of its range. In other news: the producer price index was much lower than expected; the retails sales report points to lower GDP estimates; and, the Congressional Budget Office says U.S. will hit the debt limit by early November.
The S&P 500 has retraced -1.02 percent (-20.65 points) after hitting the upper end of its price range on Monday. Markets took a downturn on Wednesday for several reasons: first, a weak retail sales report; second, the largest retailer, Wal-Mart, reported lower than expected earnings forecast; and third, the Fed’s Beige Book indicated that a number of districts show a slowdown in manufacturing activity.
U.S. producer prices are the lowest in eight months. The Labor Department report showed the producer price index (PPI) declined -0.5 percent, the largest drop since January of this year; over a 12-month period, the PPI declined -1.1 percent. Inflation has consistently fallen below the Fed’s target of 2 percent. Lower oil prices and a strong dollar are to blame for the very low inflation rate. This report reduces the probability of a Fed rate hike this year.
Poor retail sales report casts a shadow on domestic spending. Retail sales rose a lower than expected 0.1 percent (0.2 expected) for September, and August was revised down to 0.0 percent (from 0.2 percent). By category: motor vehicle and parts sales up 1.7 percent; gasoline sales down -3.2 percent; sporting goods and hobby store sales up 0.9 percent; food services and drinking places up 0.7 percent; miscellaneous stores down -1.3 percent; building materials shops down -0.3 percent; food and beverage stores sales down -0.3 percent. The report overall indicates a deceleration in domestic spending momentum compared to previous months.
The Congressional Budget Office (CBO) said the Treasury Department will deplete its cash balance by early November. September’s larger than expected deficit led to the revised prior prediction of mid-December. This means that the federal debt limit must be raised in the next few weeks, else the government will run out of cash and will stop paying its bills. Treasury Secretary Jacob Lew says the department has used extraordinary means to remain below the federal borrowing limit of $18.1 trillion, but those emergency measures will no longer be available once the debt limit is hit. Lawmakers believe that House Speaker Boehner will find a way to approve the debt limit increase before he retires (around the end of this month).
If you’re trading options, it is suggested trading Put and Credit spreads for the week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1941 and 2049 (2 standard deviations) by this Friday.
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