For the mid-week ending July 29, 2015, the Dow and the S&P 500 the markets have continued their rally before and after the FOMC announcement. In other news: the Fed is on track for a rate hike this year; mortgage applications remain flat despite a drop in rates; and, downside risks are on the horizon for the global economy.
The Dow and the S&P 500 this mid-week rose 1.04 percent and 1.39 percent respectively on mixed economic news, a big drop in China’s equity markets, and positive economic remarks by the FOMC. Economic news: Durable goods orders posted its third monthly gain showing that the negative effects of a strong dollar are easing; surprising weakness from the Case-Shiller HPI report contrasts with the FHFA house price report which helps explain the solid strength in existing home prices; a sharp drop in pending home sales of existing homes takes the edge off the housing market indicating that the housing sector may contribute less than expected to economic growth the second-half of 2015; and, the FOMC meeting announcement was as expected with the Fed waiting for further improvement in the labor market and inflation to approach 2 percent.
The Fed is expected to increase rate hikes this year. Remaining on track, a rate hike is more likely to occur this September rather than December or later. While growth remains disappointing, the Fed is optimistic about the economy (stating it’s growing “moderately”), indicating that only slight progress would be sufficient to initiate a rate hike (i.e., solid job gains and declining unemployment). The next FOMC meeting announcement is scheduled for September 16 when a rate hike is expected.
Mortgage activity barely budged despite a drop in interest rates. Total applications rose 0.8 percent for the week, with refinancing rising 2 percent. Applications to purchase a home dropped -0.1 percent. Also noted was a drop in the average size of purchase loans, indicating that entry-level buyers are increasing. The home ownership rate continues to decline; at 64.3 percent, it is the lowest rate in 48 years. The average fixed-rate for a 30-year mortgage is 4.17 percent (down from 4.23 percent), the lowest since June.
There are downside risks to the global economy on the horizon, according to IMF Managing Director Christine Lagarde. With growth “a little bit tepid”, Lagarde sees the slowdown in China as part of a “learning curve” and considers China “resilient”. The current volatility in China’s markets has not deterred the IMF from considering the yuan in its special drawing rights (SDR) basket. Despite Greece worries, Lagarde believes the euro zone is “beginning to turn the corner”.
If you’re trading options, it is suggested trading Put Credit spreads for the remainder of this week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 2073 and 2128 (2 standard deviations) by this Friday.
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