The Hunt for “Fed” October?

By C. Jonathan Camarda


There was consternation over the Federal Reserve’s decision to rates; however, most traders expected that they would leave rates unchanged. This, of course, sheds some doubt on the global recovery/picture. They cited low inflation and the risk of an ultimate economic slowdown globally. The question is when they will ultimately raise interest rates. We have two meetings, in October and December, remaining of this year. The message has been taken in many “corners” that the Fed simply does not see the economy robust enough to withstand a rate increase. Net-net this worried investors.

The yield on the 10-year U.S. Treasury dropped from 2.3% to 2.2%. Janet Yellen said the Fed was concerned about the recent turmoil globally. The issue here is that the Fed appears to have added China’s woes to its list of goals/concerns. Remember that China recently devalued their Yuan by approximately 3% as a hedge against the quarter point raise in the U.S. The domino action that the move caused is well documented with the recent global sell off and the 10% slide here in the S&P 500.

This leads us to the déjà vu scenario where we have jumped back in the proverbial DeLorean where the market is watching and wondering about the fate of rates in the next meeting (October). The talking points Yellen used was they would be “data driven” in making their ultimate “call”. In other words, “Fasten your seat belts, it’s going to be a bumpy ‘ride’,” to augment a quote of the great Betty Davis.

Economic news has been supportive of a Fed rate hike with jobless claims at 264K—less than the expected 275K. However, the Fed hasn’t taken this “pass” as its 9-1 vote proved. The Philadelphia Fed economic activity index dropped by 6, which is a nice clip below the increase of 5 prognosticated by many economists. Moreover, last month’s reading was 8.3. This counterbalance is crystal clear when it shows that the economy isn’t in “great” shape. Stay tuned for October’s meeting.

In the markets, the NASDAQ is holding up the best of all the major indices. Of course, the NASDAQ never experienced its 50-day moving average dip below its 200-day moving average (death cross). In addition to this, Technology has been very resilient, which may lead the market back to the upside. The Dow Jones remains below its 50-day moving average, as well as its 200-day moving average. The S&P 500 is mirroring the Dow Jones as it’s below its respective 50/200 day moving averages as well. The Volatility Index is down from 25 to the 21 area we saw in mid-September. This indicates a bit of calming in the markets—stay tuned.

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