Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.
The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.
Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.
The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.
Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.
Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.
The FOMC Minutes are due today at 2 pm ET (1900 GMT)
The economic calendar is light today so it’s all about flows to start the year and the FOMC Minutes later in the day.
In general, the Minutes are a release that always gets more attention than deserved. It’s rare the report moves the market and the initial move is often reversed.
But that might not be the case this time because the FOMC hiked rates at the December meeting and left the timing on subsequent rate moves ambiguous. The big market driver was the change in the dot plot.
Here is September compared to December:
Meanwhile, in the press conference Yellen emphasized that the thinking at the Fed hadn’t changed much.
“The shifts that you see here are really very tiny,” she said about the dot plot.
The FOMC decision is out at 2 pm ET (1900 GMT). At the same time, the Fed releases the dot plot and its new round of economic projections. Roughly 30 minutes later, Janet Yellen hosts a press conference.
2) The dot dance
Where the dots are located doesn’t matter. The Fed has been higher than the market since the inception of the dot plot and has always been wrong. What matters is the movement in the overall plot. If the blue dots generally move higher, it’s a hawkish signal. If they stay where they were in September, that will be USD negative.
Oil prices surged to their highest level since July 2015 on Monday raising concerns about inflation and helped push the US 10-year Treasury yield above the 2.5 per cent mark.
The yield on the US 10-year, which moves inversely to price, climbed above 2.5 per cent for the first time in two years to 2.5005 per cent.
“The bearishness in the bond market is even more acute than the bullishness on equities,” David Rosenberg at Gluskin Sheff, said.
He added: “A wall of money is exiting the bond market into the stock market — bond fund outflows in the past five weeks are at the highest in three-and-a-half years.”
Alongside energy prices, Peter Tchir at Brean Capital also said the weakness in Japan “is concerning to global bond investors”. He noted the Bank of Japan had pledge in September to keep the 10-year yield on the Japanese government bond at or below zero per cent. Instead, the JGB is now at nearly 0.8 per cent. That “might be an indication of Central Banks losing their ability or willingness to suppress interest rates,” he said.
Despite the run up in oil prices, the S&P 500 was down 0.1 per cent to 2,257.67, while the Dow Jones Industrial Average was flat at 19,760.14 — less than 300 points shy of breaching the 20,000 level. The Nasdaq Composite was down 0.5 per cent to 5,420.70.
Investors appear to be pausing for breathe following the sharp run up in stocks in recent weeks.
Not even the threat of an interest rate hike next week from the Federal Reserve could derail the U.S. stock market’s record-setting run as Wall Street posted its best five days since the presidential election and doubled down on its bet of better times ahead under new political leadership at the White House.
The bullish vibe on Wall Street is best illustrated by the blue chip Dow Jones industrial average, which surged nearly 600 points, or 3.1%, on its way to posting a fresh all-time high on each trading day of the just-ended week.
The Dow, which is up 13.4% this year, is now within 243 points of Dow 20,000, a milestone few imagined was possible at the bottom of the bear market back on March 9, 2009, when the Dow fell to 6,547.05.
The Standard & Poor’s 500 index, Nasdaq composite and small-stock Russell 2000 also finished the week at record levels.
The big gains came even though Wall Street is pricing in a nearly 100% chance of an interest rate hike from the Federal Reserve Wednesday, its final meeting of the year. Wall Street is expecting a quarter of a percentage point rise by the Fed, which would mark the U.S. central bank’s first rate hike of 2016, despite forecasts at the start of the year for three or four hikes.
Following the Fed’s meeting Wednesday, Wall Street’s attention will turn to its policy statement, its updated projections for the economy, inflation and future rate hikes, as well as Fed chair Janet Yellen’s comments during a press conference with reporters.
The big run-up in stock prices, up to this point, has been based mainly on hopes that Trump’s policies will boost economic growth as well as corporate sales and profits
Even as the US breaks for Thanksgiving, there is much for investors to consider next week.
Here’s what to watch in the coming days.
The Federal Reserve in November said it would wait for “some further evidence” before raising interest rates. Since then, US labour market, GDP and retail sales data have all come in strong. Investors will now get to parse the minutes of the Fed’s meeting, even with federal fund futures currently implying a 100 per cent chance of a rate rise next month.
Moreover, the minutes of the meeting will be dated as more than a dozen Fed officials have delivered remarks this past week, including Fed chair Janet Yellen. Testifying before the Joint Economic Committee on Thursday, Ms Yellen said that an increase in short-term interest rates could “become appropriate relatively soon”. And on Friday, New York Fed president Bill Dudley said inflation expectations “certainly seem to be” well-anchored, helping cement expectations for a rate rise next month.
“That said, the balance of Committee members in favor of raising rates as soon as the next meeting will be closely watched,” analysts at TD Secirities said. “An overwhelming majority as well as more optimistic views over inflation should help further solidify December rate hike expectations.”
Stocks rose Thursday as Federal Reserve Chair Janet Yellen emphasized that the Fed is likely to raise interest rates ‘relatively soon’, which sent bond yields higher and gave banks a boost.
The Standard & Poor’s 500 index gained 10.18 points, or 0.4%, to close at 2187.12, just 3 points short of its record closing high of 2190.15 set August 15. The Nasdaq composite index jumped 39.39, or 0.7%, to 5333.97, slightly short of its all-time closing high of 5339.52 set September. 22. The Dow Jones industrial average, which hit record highs last week, gained 35.68 points, or 0.2%, to close at 18,903.82. .
Federal Reserve Chair Janet Yellen said again that the Fed is more likely to raise interest rates soon. She testified before Congress, and in prepared remarks, Yellen sketched a picture of an improving U.S. economy. The Fed is widely expected to raise rates when it meets in mid-December. She added that if the Fed keeps waiting now and later raises rates too quickly, that increases the risk of a recession.
Bond prices slipped. The yield on the 10-year U.S. Treasury note jumped to 2.28% from 2.22%. Bond yields rise when investors expect higher interest rates.
Though the election of Donald Trump as the next U.S. president has complicated the U.S. economic outlook, financial markets still think that a Fed rate hike next month is far more likely than not. What’s more interesting to markets is when the ensuing rate hike will be and it’s here that Trump’s victory could impact. Trump has promised to cut taxes and raise infrastructure spending, measures that could boost economic growth and potentially spur inflation. That’s seen a rally in stocks, a sell-off of U.S. bond yields and a concurrent rise in the dollar.
As we reported first thing this morning, one of the burning questions troubling Wall Street at this moment, is whether president elect Donald Trump plans on reshuffling the Fed, eliminating its so-called “independent” and perhaps going so far as firing or “requesting” Janet Yellen’s resignation.
To be sure, there has been sufficient animosity between Trump and the Fed chair: recall that in early September, Trump accusedthe Fed of “keeping the rates artificially low so the economy doesn’t go down so that Obama can say that he did a good job. They’re keeping the rates artificially low so that Obama can go out and play golf in January and say that he did a good job. It’s a very false economy. We have a bad economy, everybody understands that but it’s a false economy. The only reason the rates are low is so that he can leave office and he can say, ‘See I told you.'”
Trump’s allegation made it all the way to the September FOMC meeting during which Hilsenrath asked if it is true that the Fed is keeping interest rates intentionally low for the Obama administration. Yellen responded as follows: “I can say emphatically that partisan politics plays no role in our decisions about the appropriate stance of monetary policy. We are trying to decide what the best policy is to foster price stability and maximum employment and to manage the variety of risks that we see is affecting the outlook. We do not discuss politics at our meetings and we do not take politics into account in our decisions.”
Additionally, on several occasions Trump has hinted – if not outright stated – that Yellen should resign. Which is why, as we noted in our earlier post this morning, both JPM and Goldman Sachs had to chime in and address the question, with both major banks suggesting that Yellen would easily coast through the end of her term, if not longer.
The week gets started on Monday with a banking holiday in Canada and the US. Canada is celebrating Thanksgiving while in the US banks will closed in observance of Columbus Day (but the US stock markets will be open).
As for the rest of the week, below are the risk events and releases that could impact your trading
FOMC Meeting Minutes: Wednesday October 12 at 2 PM ET/1800 GMT. At the last FOMC meeting the Fed kept rates unchanged. However three voting members dissented. The meeting minutes will be released on Wednesday and will potentially give traders more of an insight into the thinking of the FOMC members
US retail sales: Friday, October 14 at 8:30 AM ET/1230 GMT. The US retail sales for September expected to rise by 0.6% versus a -0.3% decline in August. Stripping out auto and gas, the month-to-month gain is expected to rise by 0.3% versus a -0.1% decline. Finally the control group is also expected to rise by 0.3% (versus -0.1%)
German ZEW economic sentiment index. October 11 at 5 AM ET/0900 GMT. The German ZEW index for October is expected to rebound to 4.0 from 0.5% last month (the high for the last 12 months has reached 19.2. The low -6.8). The current situation index is expected to rise to 55.5 from 55.1.
Fed Chair Yellen speaks. Friday, October 14 at 1:30 PM ET/1730 GMT). The Fed’s Yellen is speaking at the federal reserve bank of Boston’s annual research conference. The topic Is “Macroeconomic Research after the Crisis”. It will be the first opportunity for the Fed chair to speak after the most recent employment report.
China Trade Balance: Wednesday, October 12. China’s Trade balance for the month of September is scheduled to to show a trade surplus of 364.5B Yuan ($53B USD). Tis compares to 346B last month ($52.05B).