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U.S. Fortunes + Low Volatility = Rate Hike Expected

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Thursday, October 13, 2016

Import and Export numbers from September were reported before the bell this morning, pointing to positive results for the U.S. economy, albeit slight: Import prices rose 0.1% (as analysts had expected), up from an unchanged -0.2% in August. Exports rose 0.3%, and within this gap is where we see favorable leanings toward domestics.

Initial Jobless Claims for the past week also point to strength in the U.S.: 246K new claims is unchanged from a week ago, which had been revised downward by 3000 claims. Anything below 250K determines clear strength within the U.S. labor market. Domestic employment has been a high point in the overall U.S. economy.

The U.S. dollar also continues to gain on global currencies. Against the Japanese yen and the euro, the dollar finds buying power even at new highs. This also raises the spectre of a Fed rate hike, likely in the December FOMC following the U.S. general election.

Speaking of the general election, volatility had begun to rise as the race between Hillary Clinton and Donald Trump drew closer, beginning several weeks ago. However, over the past week or so odds of a Clinton victory have grown stronger, sending the VIX back down in anticipation that the next presidential administration will largely carry along the same policies as the current administration. This represents a level of certainty, which the market appreciates.

That said, market futures are down on the major indices following a pretty flat Wednesday. The S&P 500 is currently at -14.5 points at this hour, the Dow is -121 points and the Nasdaq -33.25. Apparently, all this good news in the domestic economy is triggering the increased probability in a Fed rate hike, which has near-term negative effects in the stock market.

A strong dollar, relatively robust employment, and a possible end to the U.S. earnings recession as Q3 earnings season begins to take hold are all longer-term strengths for the U.S., but pricing-in a December rate hike signals near-term selling. Many believe we’ll not really break out in either direction until after the election results are tallied.

For more information on what to expect from Q3 earnings, please check out Zacks Director of Research Sheraz Mian’s latest Earnings Trends report here: What Will Q3 Earnings Season Bring?

Mark Vickery
Senior Editor

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