After last week’s big Federal Reserve policy decision, in which policymakers elected for a “no hike” decision on global finance turbulence and China weakness, investors remain intensely focused on the potential for an interest rate hike before the end of the year.
The Fed’s own projection materials suggests a one-and-done rate hike this year that would represent the first act of monetary policy tightening since 2006.
We’ll get insight into the matter when Fed Chairman Janet Yellen speaks in Massachusetts on Thursday — her first speaking event in months. For now, sentiment continues to be dampened by nagging fears that she’ll pull the stimulus punch bowl away.
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 lost 0.2%, the Nasdaq Composite lost 0.1% and the Russell 2000 gave up 0.3%.
Materials stocks led the way down with a 2.1% decline, followed by energy, which lost 1.4% as a group. A weak flash manufacturing Purchasing Managers Index report out of China hit both sectors, falling to 47 in September from 47.3 in August — the weakest reading since March 2009. New orders fell to 46 from 46.6, while new export orders fell to 45.8 from 46.6. China’s Shanghai Composite lost 2.2% as a result.
Any reading under 50 indicates month-over-month growth.
Oil lost 3.6% to close at $44.71 a barrel in a volatile session of trading after initially trading higher on an Energy Information Administration report that stockpiles fell by 1.9 million barrels last week. The chatter was that the Whisper number on the Street was even higher. Another factor was that gasoline inventories rose by 1.4 million barrels vs. the consensus expectation for a draw of upward of one million barrels.
The black stuff looks ready for further weakness as it closed below its 20-day moving average for the first time since August.
In Europe, European Central Bank head Mario Draghi’s testimony was largely as expected, saying it was too early to tell if market and economic turbulence this summer will have an impact on the medium-term inflation outlook. Markets collectively shrugged.
This is unlikely to happen with Yellen tomorrow, as the markets’ nerves remain on edge. In fact, the S&P 500 put-to-call ratio has surged 12% in the past five days in the biggest move since 2009. Following the last occurrence, stocks lost 9%. The CBOE Volatility Index term structure remains elevated as well, as folks are nervous that there will be painful consequences at the end of the Fed’s nearly seven-year-long experiment with near-0% interest rates.
But waiting much longer carries its own risks as well, such as the risk of creating damaging asset price bubbles and fueling overconfidence and complacency. Bank of America Merrill Lynch’s Ethan Harris has a different take. He believes the Fed’s reluctance to normalize monetary policy is undermining confidence, and that last week’s decision “looks like a small policy mistake.”
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
