U.S. markets showed opening strength on Wednesday and ahead of the Fed announcement on interest rates.
As expected, the FOMC raised the funds rate target by quarter-point with the major indexes losing steam immediately following the news.
The major indexes made higher highs from the previous session ahead of the Fed news but the nasty finish was disappointing on the 2%-3% intraday swings.
Volatility held key levels of resistance for a 3rd-straight session while closing lower and remains a very slight bullish signal.
The Nasdaq tanked 2.2% despite the intraday run to 6,868.
Lower resistance at 6,850-6,900 was breached but held before the free-fall to 6,586 and fresh 52-week low.
The Russell 2000 plummeted 2% after failing major resistance at the 1,400 level just ahead of the Fed news.
The pullback to 1,344 and mew 52-week low gets longer-term support at 1,325-1,320 in play.
The Dow sank 1.5% after testing a midday high of 24,057. Upper resistance at 23,800-24,000 was cleared before the 895-point drop to 23,162.
The S&P 500 also stumbled 1.5% despite the intraday push to 2,585. Upper and major resistance at 2,575-2,600 held before the tumble to 2,488 with the index rounding out the fresh 52-week lows.
There was no sector strength for the 3rd-straight session.
Communication Services led sector laggards after tanking 2.1%. Consumer Discretionary and Technology fell 2%.
Global Economy – European markets rallied after Italy’s government reached an accord with the EU regarding its controversial budget proposal for 2019, which may avert a clash with officials.
UK’s FTSE 100 jumped 1% and France’s CAC 40 gained 0.5%. The Stoxx 600 Europe and the Belgium20 were up 0.3% while Germany’s DAX 30 added 0.2%.
German November PPI was up 0.1% month-over-month and 3.3% year-over-rear, topping expectations for a dip of 0.1% and gain of 3.1%, respectively.
UK November CPI rose 0.2% month-over-month and 2.3% year-over-year, matching forecasts. November core CPI rose 1.8% year-over-year, also matching expectations.
UK December CBI trends total orders fell 2 to 8, topping estimates for a print of 6. December CBI trends selling prices rose 5 to 14, stronger than forcasts of 8.
Asian markets settled mixed despite good news on the U.S/ China trade front after China’s Ministry of Commerce said both sides have held several rounds of talks in recent weeks and plan to hold a formal meetings in January.
South Korea’s Kospi gained 0.6% and Hong Kong’s Hang Seng climbed 0.2%. China’s Shanghai gave back 1.1% and Japan’s Nikkei fell 0.6%. Australia’s S&P/ASX 200 slipped 0.2%.
The Japan November trade balance was in deficit by 737.3 billion yen, wider than forecasts for a deficit of 630.0 billion yen. November exports edged up 0.1% year-over-year, missing expectations of 1.2% while imports rose 12.5% year-over-year, topping estimates of 11.8%.
MBA Mortgage Applications sank 5.8%, in addition to a 6.8% dive in the purchase index and a 2.3% dip in the refinancing index for the week ending December 14th.
The average 30-year fixed mortgage rate declined 2 basis points to 4.94%. The housing sector remains under pressure as high prices and low inventories collide with stretched incomes and concerns about the growth outlook.
For more on the sector, see our existing home sales, housing starts and new home sales reports.
Q3 Current Account widened to a deficit of $124.8 billion, close to forecasts. The balance on goods and services gapped down to -$158.7 billion last quarter versus the -$134.6 billion shortfall in Q2. The primary income surplus narrowed to $59.4 billion versus $62.3 billion while secondary income deficit was -$25.6 billion versus -$29 billion.
Existing Home Sales rose 1.9% to 5,320,000 in November, beating forecasts for 519,000. Single family sales climbed 1.9% to 4,710,000, from October’s 4,620,000.
Condo/coop sales increased 1.7% to 610,000 versus the prior 600,000. The months’ supply fell to 3.9 from 4.3. Regionally, sales were up in the Northeast (7.2%), the Midwest (5.5%) and the South (2.3%), with sales falling in the West (-6.3%). The median sales price rose to $257,700 from $255,100 and is up 4.2% year-over-year.
As expected, the Fed increased the funds rate band by 25 basis-points to 2.25% to 2.50%.
The Fed’s dots also dropped to two, versus three previously, and it projects the neutral rate range to 2.5%-3%.
Market Sentiment – Fed Chairman Jerome Powell said financial market volatility has increased, with financial conditions tightening. However, developments haven’t fundamentally changed the Fed’s outlook. He acknowledged the trimming in the dot plot to suggest 2 hikes next year, versus the prior 3, and that it should help support the economy going forward.
He added the economy may not be as kind to Fed forecasts in 2019 as there are two important differences, with the Committee seeing growth moderating in 2019, versus this year’s forecast for a rising pace of activity.
He added monetary policy will provide a smaller boost to the economy in 2019 while policy will be guided by incoming data, and neither the pace nor the destination is pre-determined.
Powell said wage growth has gradually moved up, in keeping with 2% inflation and 1% productivity growth. He looks for wage increases to continue, but they don’t need to be inflationary.
He said there is a great deal of anecdotal evidence of tight labor markets, but again he stressed it need not be inflationary.
Of the wide range of indicators monitored, he noted the labor force participation rate of by prime age males is still meaningfully below pre-crisis levels, suggesting some slack is still in the system.
The Fed Chairman acknowledged there’s a mood of angst around the country that growth may not be as strong as it was. However, that angst may not come into the data in a real way, though it can filter into financial conditions. He said the Fed looks at a big range of financial conditions, and monitors any sustained changes. He added some volatility doesn’t really impact the big view and there has been some tightening in conditions, which the Fed tries to factor into its models, but from a macro standpoint, no one market is a dominant indicator.
Powell reiterated the run-off of balance sheet normalization has been smooth and has served its purpose. He said it will remain on automatic pilot, with policy being set by interest rates.
Powell thinks the Fed has reached the bottom of estimates for the neutral range, though there is a high degree of uncertainty on the rate path.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 4th-straight session after trading to a high of $121.66.
January resistance at $121.50-$122 was breached but held with a move above the latter signaling additional momentum.
Rising support is at $121-$120.50.
Market Analysis – The Russell 3000 Index ($RUA) fell for the 4th time in 5 sessions despite making an opening run to 1,517.
Near-term resistance at 1,520 held with continued closes above this level needed to signal a possible near-term bottom.
Fresh and lower support from mid-September 2017 at 1,475-1,470 was breached but held with a close below the latter leading to a continued pullback towards 1,460-1,450.
RSI is in a downtrend with support is at 25-20 and October lows. Resistance is at 30-35 with a move above the latter signaling additional strength.
The Technology Select Sector Spiders (XLK) fell for the 3rd time in 4 sessions after kissing a low $61.76.
Fresh and February support at $61.75-$61.50 was breached but held with a move below the latter getting $60 in play. The 52-week low is at $60.97.
Lowered resistance is at $63-$63.50. Continued closes back above $65 would be a more bullish development and possibly signal a short-term bottom.
RSI is in a downtrend with support at 35-30.
A move below this level gets 25-20 and oversold October lows back in play. Resistance is at 40.
Existing Position Update
I’m staying defensive since markets are being driven by global tension at this time.
We may initiate one more position before end of week.
Volatility is strong and non directional – which creates potential danger for iron condors.
It’s best to stay directional and think short term right now.
Nimbleness is key at this juncture.
I may put on more positions before end of the week.
Roger Scott