U.S. markets were choppy throughout the session following the Fed’s decision to leave interest rates unchanged. The Dow and S&P 500 set fresh all-time intraday and closing highs with the Russell 2000 also finishing in positive territory. The Nasdaq showed some strength on the open but spent much of the session underwater afterwards with the Tech sector falling 0.4%.
Consumer Staples were the weakest sector after falling 0.9%. Industrials, Energy and the Financials led the sectors in the green.
Global Economy – European markets traded in a tight range as overseas investors stayed on the sidelines ahead of the FOMC minutes. France’s CAC 40 and Germany’s DAX 30 added 0.1%. The Belgium20 fell 0.2% while UK’s FTSE 100 slipped 0.1%. The Stoxx Europe 600 dipped a tenth-point, or 0.04%.
U.K. retail sales rose 1% on the month in August, topping expectations for a rise of 0.3%.
Asian markets showed little reaction while finishing mixed following President Trump’s speech at the United Nations and his comments concerning North Korea. China’s Shanghai index and Hong Kong’s Hang Seng Index climbed 0.3% while Japan’s Nikkei advanced 0.1%. South Korea’s Kospi declined 0.2% and Australia’s S&P/ASX 200 gave back 0.1%.
Japan August exports rose a more-than-expected 18.1% year-over-year, the biggest increase in 3-3/4 years.
MBA Mortgage Applications Composite Index fell -9.7% for the week ending 9/15.
Existing Home Sales dropped 1.7% to a 5.35 million rate in August, which was weaker than expected and a third consecutive decline.
Market Sentiment- The FOMC announced it would start its balance sheet runoff in October and left rates unchanged, as expected. The vote was 9-0. The FOMC also left a rate hike on the table for December, with 12 of 16 FOMC members projecting such. Also, 11 of 16 see three hikes next year.
The hurricanes are not expected to have much impact on the medium term. The FOMC did lower the long run outlook on rates to 2.75% from 3.0%.
The unwind of the portfolio will follow the path projected in June, at $10 billion per month, with $6 billion in Treasuries and $4 billion in MBS (mortgage-backed securities).
Fed Chair Janet Yellen reiterated the FOMC statement noting the economy will continue to expand at a moderate pace over coming years. Meanwhile, the labor market remains healthy and payroll gains are well above the rate needed to absorb entrants. Inflation has continued to run below the 2% goal, but the low rate doesn’t reflect broad economic conditions.
In Q&A she noted the shortfall this year remains more a mystery, and is not really tied to cyclical items, though there have been some transitory factors impacting. If the shortfall is persistent, the Fed will have to adjust policy to address that. She added the usual caveat though, that policy acts with a lag, suggesting that argues for a cautious approach.
Yellen also added the FOMC has hiked rates this year on the belief the economy is performing well. She added the balance sheet runoff has begun too, as such stimulus is no longer needed to such an extent. The improvement in the labor market has been substantial and vast, she stressed and including a number of data points supporting her case, including jobs and the unemployment rate.
She said the Fed also sees sufficient strength in spending and growth to keep the job market strong over the medium term, suggesting the rate hikes are well justified. In closing, she said the Fed is committed to the 2% inflation goal, and they will balance the risks of potentially tightening too much and undermining the inflation objective, or not tightening enough and letting inflation get out of control.
The iShares 20+ Year Treasury Bond ETF (TLT) pulled back for the third-straight session after testing a low of $125.33. Support at $125.50 and the 50-day moving average held into the closing bell.
A move below $125.25-$125 would open up risk for a continued backtest to $124 and early August support. Lowered resistance is now at $126-$126.25.
Market Analysis- The PowerShares QQQ (QQQ) had been in a tight range between $145-$146 for seven trading sessions with upper resistance holding following all-time highs last week.
Today’s pullback to $144.23 held support at $144.25-$144 and levels that have been holding following the late August breakout. A move below $144 opens up risk to $143.50-$143 and gets the 50-day moving average in play.
The Industrial Select Sector (XLI) continues to show strength following the breakout above multi-month resistance at the $69 level. Today’s high reached $70.38 with fresh hurdles at $70.50-$71.
Current momentum and a close above the later could lead to $72-$72.50. However, RSI has tripped 70 and is signaling overbought levels. Current support is at $70-$69.75 with a move below $69.50 likely confirming a near-term top.
All the best,