U.S. markets traded in a tight range throughout much of Wednesday’s session but showed some strength ahead of the Fed’s decision on interest rates.
There was not a major reaction after the Fed confirmed another quarter-point hike although the major indexes traded to session lows into the close on the news.
Fresh all-time highs remain in play as the pullback was contained with near-term support holding and the major indexes closing lower for the session. Volatility was slightly elevated into the closing bell but held key levels of resistance.
The Nasdaq was off 0.1% despite testing an intraday record high of 7,748 but was unable to hold 7,700 after closing below this level by 5 points.
The Russell 2000 fell for just the 2nd time in 9 sessions after giving back 0.3% and failing a fresh record high by 2 points.
The S&P 500 tested a weekly high of 2,791 but declined 0.4% after trading in a super tight 17-point range.
The Dow declined 0.5% despite showing first half strength and reaching a morning peak of 25,362 while holding major support at the 25,000 level on the pullback.
Consumer Discretionary and Health Care were up 0.2% and 0.02%, respectively, and were the only sectors that showed strength.
Real Estate got walloped after dropping 2.2% and was easily the worst performing sector while Materials fell 1.1%. Industrials were off 0.8%.
Global Economy – European markets finished mixed following weaker-than-expected economic news and ahead of Thursday’s ECB’s outlined plans for winding down its bond-buying program.
Germany’s DAX 30 was higher by 0.4% and the Stoxx 600 Europe was up 0.2%.
The Belgium20 gave back 0.1%. UK’s FTSE 100 slipped a tenth-point, or 0.0% and France’s CAC 40 dipped less than a point, or 0.01%.
Eurozone April industrial production fell 0.9%, weaker than expectations for a drop of 0.7%.
UK May CPI rose 0.4% month-over-month and 2.4% year-over-year, matching forecasts. May core CPI rose 2.1% year-over-year, also meeting expectations.
The UK April house price index rose 3.9% year-over-year, and represented the smallest increase in 13 months.
Asian markets settled mostly lower with South Korea’s Kospi closed for a holiday and ahead of key decisions from central banks in the U.S. and Europe.
Hong Kong’s Hang Seng tanked 1.2% and China’s Shanghai sank 1%. Australia’s S&P/ASX 200 was lower by 0.5%. Japan’s Nikkei gained 0.4%.
The Producer Prices Index for May showed a headline month-over-month increase of 0.5%, versus the estimates for an increase of 0.3%. The core PPI was up 0.3%, while forecasts were for a monthly rise of 0.2%.
U.S. chain store sales bounced 1.7% in the week endingJune 9th, after plunging 5.6% in the June 2nd week.
The annual pace accelerated to a 4.4% year-over-year pace versus the prior 3.8% rate.
Market Sentiment – The FOMC raised the Federal Funds Rate by 25 basis-points to 1.75%-2%. The Federal Reserve members raised their median expectation for the Federal funds rate at the end of 2018 to 2.4%, up from their March projection of 2.1%.
The projections, often referred to as the dot plot, showed that the median expectation for the end of 2019 Federal funds rate is now 3.1%, up from 2.9% in the March projection.
The statement also indicated the labor market continued to strengthen and economic activity has been rising at a solid rate.
On inflation, the Fed basically repeated both overall inflation and inflation for items other than food and energy have moved close to 25, while longer term inflation expectations are little changed.
The Fed said risks to the overall outlook remain balanced and there was no mention of trade or tariffs. The vote was a unanimous 8-0.
The FOMC Forecast revisions released alongside the FOMC statement revealed only small boosts to GDP estimates in 2018 and a narrowing in estimates for 2019, with some trimming of high-end estimates in 2020.
The Fed’s March GDP estimates incorporated the CBO scoring of the final tax law, and strength in economic reports since then had little upward effect.
There were larger than expected cuts in the jobless rate estimates across the forecast horizon that were larger for high-end estimates, as the FOMC responded to the stronger growth path for payrolls.
The dot plot showed an only tiny upward shift in the array of Fed funds rate estimates in 2018-2019, and a narrowing in 2020 that included a big downward bump in the high end of the range.
The median Fed funds rate estimate for 2018 edged-up to four hikes from three, which captured the headlines, though it reflected a quarter-point boost in 2018 for only one participant’s estimate.
On the yield curve, there are a range of views on the FOMC as the discussion of the spread is really about appropriate policy, Powell said. Analysts know why it’s flattening, noting that the Fed has been raising the funds rate.
As far as the Fed’s estimates, Powell said analysts are learning about the location of the natural rate as they go and said the FOMC has a wide range of estimates on it.
He said, despite a still low unemployment rate by 2020, the FOMC forecasts still show inflation close to target.
On language in the statement and the reiteration of accommodative, the Fed head said the FOMC recognizes it may have to change as rates will soon be in the neutral zone.
However, he added the term is a characterization and not a statement, and the real message is that the rate is getting close to neutral.
Fed Chair Powell also announced the FOMC would move to a press conference after every meeting, beginning with the January 18-19th,2019 meeting.
He stressed that this wouldn’t signal anything about the timing or pace of future interest rate changes and is being done to improve communications. The FOMC will continue to release economic forecasts on a quarterly schedule.
Powell said the plain English spin was that the Fed believes the economy is doing well.
The iShares 20+ Year Treasury Bond ETF (TLT) traded to an intraday high of $119.64 before closing slightly lower.
Resistance at $119.50-$120 was split and held with a move above the latter being a slightly bullish signal.
Support at $119-$118.50 was also tested on the dip below the 50-day moving average and levels that have been holding for 5-straight sessions..
Market Analysis – The Spider Small-Cap 600 ETF (SLY) traded to an all-time high of $74.57 with fresh resistance at $74.50-$75 now in play.
Continued closes above the latter could lead to a run towards $76.50-$77.50, depending on momentum.
Current support is at $73.50-$73 with a move below the latter signaling a possible short-term top.
RSI is trying to hold support from the back half of May at 65-60 with a move below the latter being a slightly bearish development. Current resistance is at 70-75 with continued closes above the latter leading to a possible push towards 80-85.
Bitcoin Investment Trust (GBTC) is nearing its 52-week low after trading down to $10.52 intraday. Near-term support is at $10.50-$10 with a close below the latter being a continued bearish development.
Lowered resistance is at $10.75-$11.25 with further hurdles at $11.75-$12.
We mentioned a possible death-cross was back in play in late May after highlighting the small gap between the 50/200-day moving averages at the time.
We said this bearish setup with the 50-day moving average closing below the 200-day moving average could lead to lower lows and it’s too early to say if the longer-term floor of support at $10 will hold.
RSI is back in a downtrend after peaking near 50 earlier this month. Support at 30 from early February and late March is in play with continued closes below this level leading to 25-20 and lower lows for GBTC.
Resistance is at 35-40.
Existing Position Update
Entered AMZN Iron condor. Expect price to congest over the near term since markets have been trending increasingly over the near term.
PYPL appears to be ready for downside trading action.
TSLA upside is fizzling out. Premium cheaper to expire than to offset.
Should have another position before end of week.
Roger Scott