Market Light Weekly Update September 26th, 2017: Rising Interest in Interest Rates

John Dupriest Market Light

market light september 26th 2017“U.S. labor-market hiring is robust, stock markets have hit record highs, global growth is recovering, and Janet Yellen does not want to leave interest rates on hold.”

 

That Bloomberg News headline says a bunch. Low interest rates have been a conundrum for several years. Low rates were supposed to make borrowing easier, then easy, then almost free. But something happened on the way to the vault … not much borrowing was occurring and not much capital spending on new equipment or higher wages was occurring. So things have just plugged along.

 

For years the Fed has had an annualized inflation target of 2%. On paper, it has been hard to reach. In the super market, not so much. We are seeing higher prices all around yet the government’s tally is that inflation is sluggish and (insert dramatic pause) at risk of declining!  One of the fears of Janet Yellen’s is if we have a return to disinflation, wages will stagnate or decrease and capital spending will be again postponed. Fed members think that’s bad. As a result, the odds of a December rate increase has risen to 70% from last Monday’s 63% chance. Signals also show an expectation of THREE more increases in 2018. To paraphrase the late Senator Everett Dirksen, pretty soon you’re talking some real money.

 

The Market Light moves to a slightly more cautionary color this week. Nothing big, mind you. Just a hairline crack or two. If you saw those cracks over your entryway, you’d say a little settling has happened, it is not the foundation collapsing. But this is the fourth day in a row the Dow has closed lower – by only a scoonch. And we still haven’t seen any real seasonal trauma which sometimes happens around vernal equinox day (i.e., “fall”). Hopefully, we won’t this year.

 

Top relative strength sectors this week have some new players. Oil & Gas Services had languished at the bottom of the well for months; now they’re rebounding. Same can be said for Oil and for Natural Gas. The top five are Rare Earth Metals (REMX), Lithium (LIT), Oil (DBO), Natural Gas (FCG), and Canadian Energy (ENY).  Laggards were Livestock (COW), India Earnings (EPI), Mexico (EWW), Pharmaceuticals (XPH), and Consumer Staples (XLP).

 

The Technical Tea Leaves are steeped in their own deep thoughts this week: No new signals fired.