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Friday, August 19, 2016
Markets waver on Fed interest rate bets
Dow gave back 29, decliners over advancers 2-1 & NAZ went up 1. The MLP index fell 2+ to the 316s & the REIT index lost 2+ to 360. Junk bond funds did little & Treasuries were sold. Oil was flattish after its run (see below) & gold was lower.
Federal Reserve officials have gone out of their way this week to
stress the market is underestimating the odds of an interest-rate
increase this year, & yet the probability of such a move has fallen
back below 50%. The view policy makers will be on hold for a
long time isn’t “consistent” with what the central bank is saying, San
Francisco Fed's John Williams said. NY's William Dudley said the market is underestimating the likelihood of increase.
Investors have shrugged off these comments with Treasuries holding onto
their best YTD performance since 2011. A measure of volatility
is close to the lowest since 2014.
The 2-year note yield, among the maturities most sensitive to the
outlook for Fed policy, was little changed this week at 0.72% & the price of the 0.75% security due Jul 2018 is 100 2/32.
The benchmark 10-year note yielded 1.54%. The probability of a rate increase by year-end is 47%,
according to fed fund futures. The
measure climbed to 51% on Tues before dropping back the
following day. The chances of a move at the next meeting on Sep 20-21 are just 20%.
While recent Fed rhetoric has been hawkish, minutes of the Jul policy meeting showed officials were split on
whether an interest-rate increase was needed in the near future.
Oil is headed for its strongest weekly increase in 4 months after
entering a bull market as the market weighed speculation that OPEC talks
next month could lead to an output freeze & US inventories dropped. Futures
were little changed & poised for a weekly increase of 8%. While OPEC is unlikely to reach a deal to freeze production,
its plans to hold informal talks in Algiers next month “were the spark”
behind the rally. US crude inventories
dropped the most in 5 weeks thru Aug 12, while fuel stockpiles
slid a 3rd week, Energy Information Administration data showed.
Oil
has climbed more than 20% since it dipped below $40 a barrel
earlier in the month, meeting the common definition of a bull market.
Russian Energy Minister Alexander Novak said that the nation was open to
discussing a freeze after his Saudi counterpart Khalid Al-Falih said
that informal talks in Sep may lead to action to stabilize the
market. While money managers increased wagers on rising oil prices by the most since Jan during the week ended
Aug 9, bearish bets on crude remain at record high levels.
Deere posted lower quarterly earnings as the soft global agricultural economy depressed sales of its farming machinery. EPS was $1.55, versus $1.53 per share, a year
earlier (when there was more outstanding stock). "John Deere's performance in
the third quarter reflected the continuing impact of the global farm
recession as well as difficult conditions in construction equipment
markets," CEO Samuel R. Allen said. The company increased its fiscal-year earnings outlook to $1.35B from $1.2B. The stock shot up 4.44. If you would like to learn more about DE, click on this link: club.ino.com/trend/analysis/stock/DE?a_aid=CD3289&a_bid=6ae5b6f7
This is a sleepy Fri in Aug, with little going on in the stock market. Not much should happen until the end of Aug when Janet gives a speech which may suggest what the Fed is thinking about doing with interest rates. The popular market averages remain close to their record highs, hard to believe.
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