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ETFs to Watch as Fed Members Indicate Rate Hike in September

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The possibility of a rate hike in Fed’s September policy meeting increased following comments from two Fed officials. While the New York Fed President William Dudley indicated that the hike is quite possible next month, the Atlanta Fed President Dennis Lockhart said that the current situation is favorable for “at least one” rate increase by the end of this year. The broader markets ended in red on Tuesday following the comments.

Debt driven sectors including utility and real estate were negatively impacted by the indications of a September hike. However, the financial services sector, which is poised to gain from a rate increase, ended in the green on Tuesday.

Lockhart Indicates “At Least One” Hike

Ahead of Fed Chairwoman Janet Yellen’s speech on Aug. 26 in Jackson Hole, WY, the Fed officials remained in favor of a rate hike in the near term. In a speech at the Rotary Club of Knoxville, TN, Dennis Lockhart indicated that there is a high chance of a minimum of one rate hike by the end of this year. Lockhart said: “I'm not locked in to any policy position at this stage, but if my confidence in the economy proves to be justified, I think at least one increase of the policy rate could be appropriate later this year.”

He also said that though “advance estimate” released by the Bureau of Economic Analysis showed that the economy expanded at a lower-than-expected pace during the fourth quarter, recently released data showed that the economy is headed to witness impressive growth in the days ahead. He said: “Early indications of third-quarter GDP growth suggest a rebound. I don't believe momentum has stalled. I remain confident about prospects in the second half of 2016 and 2017.” He also added: “We've seen pretty strong employment performance despite the weaker-than-expected growth of real GDP… While jobs growth has been impressive, wage growth has been modest over the full period of recovery.”

Dudley Signals September Hike

Separately, William Dudley also remained confident about the prospects of the U.S. economy in the days ahead and indicated that the rate hike in September’s policy meeting is “possible.” He said:  “We're edging closer towards the point in time where it'll be appropriate to raise interest rates further.” He also stated: “I think we're looking for growth in the second half of the year that'll be stronger than the first half — so some acceleration in the growth outlook.”

He thinks that the U.S. “economy is in OK shape.” He also said that the economy is witnessing progress, and might help the key inflation to rise to the targeted level of 2%. The comments from Lockhart and Dudley raise speculations among investors that the Fed may consider hiking the key interest rate in its next policy meeting, which is scheduled to be held on Sep 20-21.

ETFs to Watch

Rising rate hike prospects had a significant impact on rate sensitive sectors. While sectors including utility and real estate that require significant amount of debt to finance their investments were affected by the speculations, financial services gained from the same. Two popular ETFs from the utility sector – Utilities Select Sector SPDR ETF XLU and Vanguard Utilities ETF VPU – declined 1.2% each on Tuesday. Meanwhile, broader real estate ETF – Real Estate Select Sector SPDR (XLRE - Free Report) – registered a loss of 1.1% during the day.

Moreover, the chances of a rate hike dragged down the broader consumer discretionary ETF, Consumer Discretionary Select Sector SPDR ETF XLY by 0.6%. A rate increase is expected to have a negative impact on consumer spending, which in turn may affect the consumer discretionary sector. Despite the decline in broader markets, financial services ended in the green on Tuesday given the possibility of a rate hike next month. The Financial Services Select Sector SPDR XLFS rose 0.2% on the day.

While comments from the Fed officials indicated a rate hike, investors will eagerly wait for Yellen’s Jackson Hole speech on Aug 26 in order to find more clues about the rate hike path. This implies that the above mentioned rate sensitive ETFs will be on investors’ radar in the coming days.

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