Including the previous Friday’s trade, the Dow Industrials have subsequently posted their first consecutive five-day losing streak since February. More importantly, US equity markets reversed lower on a day when the Fed not only left rates unchanged but also lowered expectations for the potential number of raises this year. Rather than rally in response, as has been the response to accommodation since the financial crisis, volume dried up and markets slumped into the closing bell. Investor response to the FOMC Announcement and subsequent press conference are an indication that the weak outlook as framed by Chair Yellen has the street concerned.
Those on the street with a cynical bent believe that the Fed is not actually in a position to raise rates, even if they wanted to; which is not entirely clear. As Chair Yellen underscored in her press conference on Wednesday, recent US economic data has been mixed while employment gains have slowed. Additionally, the increasing likelihood of a Brexit, clearly has the Fed on hold.
The problem is that the Fed’s guidance is increasingly less consistent. It appears as though Fed officials from Chair Yellen on down were attempting to convince markets and investors over the past several months that a move on rates was on the table while in reality the Fed has not only not raised rates this calendar year, they have actually lowered expectations. It was little more than six months ago when investors were led to believe there was a high probability that we would see four moves in rates in 2016. At the end of the day we may get one, possibly two. That’s fine by most accounts except for two things. Either the Fed is attempting to jawbone investors by suggesting they may raise rates when there is in fact little will to do so or the Fed is consistently overestimating the growth in our economy. In either case, investors are clearly growing exhausted. To be clear, as I pointed out in Monday’s note, no one actually expected the Fed to move on rates yesterday. Rather, it was the lowering of expectations of further moves that has the street less confident and decidedly more risk aware than had been the case last week.
Additionally, a bit of positive momentum was taken out of the crude oil trade yesterday as a result of the less than robust and mixed EIA Petroleum Status Report. Crude oil inventories dropped a mere 0.9M barrels on the week versus last week’s 3.2 M barrel draw. Gasoline inventories dropped 2.6M barrels and Distillates rose 0.8M barrels. The result was a move lower in the energy sector. The PPI-FD M/M change came in at 0.4% versus last month’s 0.2% but on a year-over-year basis that reading slipped to a negative at -0.1%. Meanwhile the Industrial Production data for the month was a worrisome -0.4% versus expectations that were calling for -0.1%. Last month’s reading was a solid gain of 0.7%. The data on the day was very much in keeping with the uneven narrative highlighted by Chair Yellen.
So there you have it: rates unchanged, expectations lowered, economic data mixed to weaker and a bit of confusion. No one said it would be easy. The result on Wednesday was modestly lower prices across the board coupled with a drop in volume. The S&P 500, Nasdaq and Dow Industrials all gave back 0.18% while the NYSE (-5.12%) and Nasdaq (-6.93%) saw volume contract.
We should see a meaningful uptick in volume heading into Friday’s quad-witching. Just to reiterate, if that quad-witch inspired volume does coincide with an S&P 500 below 2100 look for the path of least resistance to remain lower. Our recent uptrend is under pressure and from where I sit, I would suggest that a distribution day or two are on the horizon.