U.S. equities posted a nice rally on Tuesday after a batch of weak economic data slammed Treasury bonds and seemed to raise hopes that Federal Reserve would hold off on raising interest rates at its upcoming policy announcement on Thursday.
In the end, the Dow Jones Industrial Average gained 1.4%, the S&P 500 gained 1.3%, the Nasdaq Composite gained 1.1%, and the Russell 2000 gained 1.1%.
Industrial stocks led the way with a 1.7% gain followed by financials, which rose 1.5%. Fitness wearables maker Fitbit (NYSE:FIT) gained 3.3% thanks to a positive initiation of coverage by analysts at Pacific Crest, who noted that sell-through checks indicate near-term upside for the stock.
Two-year Treasury yields hit levels not seen since 2011 at 0.81% as prices weakened. That boosted the ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) position recommended to Edge subscribers by 3.7% on a lift in inflation expectations.
Basically, it works like this: If the Fed won’t conduct its first rate hike since 2006 this week, maintaining its near-0% interest rate policy a little longer, inflation is more likely to rise. That, in turn, is bad news for Treasury bonds.
But higher inflation expectations and the hope of a continuation of easy monetary policy boosted commodities prices. Crude oil gained 1.5% to close at $44.66 a barrel. Energy stocks gained 1.1% as a result — boosting stocks like Chevron (NYSE:CVX) which I recently covered in an article here.
Retail sales increased 0.2% on a month-over-month basis in August, below the 0.3% result analysts were expecting. Industrial production fell 0.4% month-over-month in August, below the 0.2% decline analysts were expecting. Manufacturing production dropped a larger-than-expected 0.5% due to a 6.4% decline in auto production.
With the Fed set to start its two-day policy meeting tomorrow, the chatter on Wall Street is increasing. No one knows what to expect, but there is no shortage of opinions on the matter, well-informed or otherwise.
Bank of Japan Governor Kuroda was upbeat overnight saying a rate hike now would be a positive signal. A team of researchers at Deutsche Bank led by David Folkerts-Landau issued a special report today outlining their reasons why the Fed should raise rates now, including:
- The fact the labor market is at or very close to full employment.
- Relatively stable global economic growth prospects.
- U.S. inflation held down by temporary factors as unit labor cost inflation increases to levels consistent with the Fed’s long-term goals.
- The lags inherent in monetary policy, the risks of waiting too long, and the risks of creating asset bubbles and instability by keeping rates near 0%.
- And evidence, shown in the chart above, that the Fed should no longer be so far from neutral on its policy given that it’s so close to its inflation and employment goals.
But Goldman Sachs chief economist Jan Hatzius said the Fed is still far away from its 2% inflation target, reiterating his expectation of a December rate liftoff window and adding that there is a risk of an adverse market reaction to a rate hike.
There is even a possibility of the Fed delaying any policy changes until 2016, in his view.
With two days to go, all we can do is wait as the tension builds and stocks remain range-bound.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
