For the week ending September 18, 2015, the Dow and S&P 500 both declined after the FOMC announcement on Thursday. The Dow dropped -0.30 percent for the week and the S&P 500 dropped -0.20 percent. In other news: The Fed held interest rates unchanged due to a weakening global economy; China is considering another devaluation of its currency; and, leading economic indicators edge up suggesting U.S. growth will continue through year-end. Below is a recap of the markets for each day of the week.
The markets dropped on Monday ahead of the retail sales report and the FOMC announcement. Oil dropped to $44.50. The Dow fell -0.40 percent to 16,370; the S&P 500 dropped -0.41 percent to 1953.
On Tuesday, the markets sharply rose on expectations the Fed will not raise rates on Thursday. Oil rose $0.50 at $45. The Dow rose 1.40 percent to 16,599; the S&P 500 rose 1.28 percent to 1,978.
The markets again rose on Wednesday as the consumer price index shows no inflation to support a rate hike. Oil rose $2.50 to $47.50. The Dow rose 0.80 percent to 16,739; the S&P 500 rose 0.87 percent to 1,995.
The markets dropped on Thursday after large swings following the FOMC announcement citing risks tied to China, and a rate hike to occur either in October or December. Oil dropped $0.50 to $47.00. The Dow dropped -0.40 percent to 16,674; the S&P 500 dropped -0.26 percent to 1,990.
On Friday, the markets moved sharply lower on expectations of weakening U.S. growth due to comments made by Fed Chair Yellen. Oil dropped $2.00 to $45.00. The Dow dropped -1.70 percent to 16,384; the S&P 500 dropped -1.62 percent to 1,958.
Stocks end the week down on fears of slowing global economy. Worries over the global economy affecting the U.S. market increased after Fed Chair Yellen raised concerns regarding China (the second largest economy), low inflation, and unsettled financial markets. The Dow ended Friday down 290.16 points (-1.70 percent); the S&P 500 ended down 32.17 points (-1.60 percent). The VIX (a measure of investor fear) climbed 5.4 percent to 22.28. The S&P 500 is now down approximately -8 percent since its record close in May.
The Fed held interest rates unchanged. A number of reasons were cited: the labor market is still exhibiting weakness (labor participation rate is at high levels last seen in the late 1970s, and the labor underemployment rate (U-6) is at peak levels seen in the 2001 recession); the quality of jobs has dropped (part-time jobs have replaced full-time jobs, lower paying service jobs have replaced lucrative manufacturing jobs, and the median household income as remained at the same level as 1996 after adjusting for inflation); inflation remains flat and could turn negative (deflationary) as China’s economy continues to decline; and, the global economy and global financial system is showing signs of instability and a Fed rate hike would only exacerbate the situation. The most important factor influencing the Fed is the growing volatility in the markets, which indicate further declines in the major indexes (Dow and S&P 500).
While Fed Chair Janet Yellen indicated that a rate hike is likely this year (as early as October), economists believe that China’s economy will determine if a rate hike makes sense. Global economic and financial developments are likely to continue the downward pressure on inflation and could lead to deflation by the end of the year. There is also the concern of China devaluing its currency again (which will cause the dollar to increase in value). Other metrics the Fed will consider are commodity prices, average hourly wages, and the housing market.
The Fed mandate is full employment and price stability (moderate inflation). Its recent concern about the global economy seems to indicate a third mandate for the Fed: global financial stability. What’s happening in China negatively impacts the Fed’s inflation goal of 2 percent, and could easily lead to deflation. China’s economy helps drive global growth, and its decline will cause emerging markets to further decline, along with the economies in Europe and Asia. To keep abreast of the global economy, watch the price movement of oil and the growth level of China’s economy (GDP).
China, which devalued its yuan last month (causing a major drop in the markets), is considering another devaluation of 15 to 20 percent by year-end. The devaluation will help China become more competitive as an exporter, but it could lead to a currency war where competing countries devalue their currency to gain a competitive edge. The expectation is the crisis in Asian foreign exchange and asset markets will take a significant hit if China does devalue the yuan.
Leading indicators for the U.S. economy rose 0.1 percent higher in August. The Conference Board’s Leading Economic Index (LEI) rose slightly indicating that GDP growth will remain moderate through year end. However, global events could change the direction of the LEI if the impact on the U.S. becomes significant.
The bottom line: the collapse last week in the consumer sentiment index indicates that China’s declining growth in its economy is having an impact on the U.S. economy. The Fed indicated its concern in the global economy (especially China) is one reason why a rate hike was deferred. How the labor market continues to unfold and the direction of inflation will determine if a rate hike this year will occur.
The focus next week in the U.S. will be on the housing market: existing home sales, the FHFA house prices, and new home sales. Also of interest will be durable goods orders. Globally there will the release of flash manufacturing PMIs and the election in Greece (on Sunday). In addition, the focus will be on the following: UK (nothing); eurozone (manufacturing and composite PMI, M3 money supply); Germany (manufacturing and composite PMI); China (manufacturing PMI); and Japan (manufacturing PMI, consumer price index).
Year-to-date the markets are mixed: Dow -8.1%; S&P500 -4.9%; Nasdaq +1.9%.
The Markets for the past week were: DJIA down -0.3%; S&P500 down -0.2%; Nasdaq COMP up 0.1%.
Commodities (ETFs) for the past week were: Gold (GLD) up 2.87%; Silver (SLV) up 3.73%; Oil (OIH) down -0.07%; Dollar (UUP) up 0.12%; 30-year Bonds (TYX) dropped 1 basis points to 2.93%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 22.28% reflecting the certainty of no rate hike in September but continued concerns over the global economy.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is moderate:
o Monday – Existing Home Sales
o Tuesday – nothing
o Wednesday – PMI Manufacturing Index, EIA Petroleum Status Report, Janet Yellen speaks
o Thursday – Weekly Jobless Claims, Durable Goods Orders, New Home Sales
o Friday – GDP
If you’re trading options, it is suggested trading Put and Call Credit spreads for next week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1841 and 2080 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.