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Beyond the Number

Uncertainty About Interest Rate Outlook May Lead To Choppy Trading
9/19/2019 8:58 AM

The major U.S. index futures are pointing to a roughly flat opening on Thursday, with stocks likely to extend the choppy trading seen late in the previous session.

Traders may be reluctant to make significant moves amid renewed uncertainty about the outlook for interest rates following the Federal Reserve’s monetary policy announcement on Wednesday.

The Fed lowered interest by 25 basis points as expected but indicated officials are mixed about whether the central bank should cut rates again before the end of the year.

While seven participants expect another rate cut before the end of year, five expect rates to remain unchanged and another five expect rates to be raised back to 2 to 2-1/4 percent.

The central bank reiterated that it will “act as appropriate” to sustain the economic expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

CME Group’s FedWatch Tool currently indicates a mixed outlook for rate cuts at the Fed’s next meetings in October and December.

Stocks saw considerable volatility following the Fed’s monetary policy announcement on Wednesday before eventually ending the session little changed.

The major averages initially came under pressure after the Fed announcement but showed a notable rebound to end the day on opposite sides of the unchanged line.

While the Nasdaq edged down 8.62 points or 0.1 percent to 8,177.39, the Dow inched up 36.28 points or 0.1 percent to 27,147.08 and the S&P 500 crept up 1.03 points or less than a tenth of a percent to 3,006.73.

The volatility on Wall Street came after the Fed revealed its widely expected decision to cut rates by another 25 basis points, lowering the target range for the federal funds rate to 1-3/4 to 2 percent.

The latest rate cut was once again attributed to the implications of global developments for the economic outlook as well as muted inflation pressures.

The accompanying statement was largely unchanged from July, with the Fed reiterating that the labor market remains strong and that economic activity has been rising at a moderate rate.

The Fed did acknowledge in its latest statement that exports have weakened along with business fixed investment, although the central bank noted household spending has been rising at a strong pace.

The decision to cut rates was widely expected by economists but was not without dissent from members of the Federal Open Market Committee.

The FOMC voted 7 to 3 to lower rates by 25 basis points, with St. Louis Fed President James Bullard preferring a 50 basis point cut and Kansas City Fed President Esther George and Boston Fed President Eric Rosengren preferring to leave rates unchanged.

The Fed's economic projections suggest that the meeting participants are also divided about the outlook for interest rates.

The modest rate cut was not well received by President Donald Trump, who recently urged the Fed to lower interest rates to zero or less

"Jay Powell and the Federal Reserve Fail Again. No 'guts,' no sense, no vision! A terrible communicator!" Trump tweeted shortly after the announcement.

Fed Chairman Jerome Powell said in his post-meeting press conference that the central bank is prepared for a more "extensive sequence of rate cuts" in the face of an economic downturn but noted that is not currently expected.

Powell also told reporters that he does not foresee the Fed using negative interest rates as a policy tool, as Trump has suggested.

"If we were to find ourselves at some future date again at the effect of a lower bound, again not something we are expecting, then I think we would look at using large scale asset purchases and forward guidance," Powell said.

The Fed announcement largely overshadowed a Commerce Department report showing a substantial rebound in new residential construction in the month of August.

Gold stocks showed a significant move to the downside on the day, dragging the NYSE Arca Gold Bugs Index down by 2 percent.

The sell-off by gold stocks came as the price of the precious metal finished regular trading modestly higher but fell sharply in electronic trading.

Considerable weakness was also visible among natural gas stocks, as reflected by the 1.9 percent slump by the NYSE Arca Natural Gas Index.

Steel, transportation and oil service stocks also ended the day notably lower, while most of the major sectors showed only modest moves.

Commodity, Currency Markets

Crude oil futures are jumping $1.29 to $59.40 a barrel after slumping $1.23 to $58.11 a barrel on Wednesday. Meanwhile, after rising $2.40 to $1,515.80 an ounce in the previous session, gold futures are falling $8.40 to $1,507.50 an ounce.

On the currency front, the U.S. dollar is trading at 107.96 yen compared to the 108.45 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1067 compared to yesterday’s $1.1030.

Asia

Asian stocks ended mostly higher on Thursday after the Federal Reserve cut interest rates for the second time this year but offered mixed signals about the outlook for rates.

The Bank of Japan, meanwhile, left its monetary policy unchanged as expected, despite growing risks to the country's fragile economic recovery.

Chinese shares ended on a positive note as investors waited to see whether China would lower its new lending reference rate on Friday following the Fed's rate cut and the easing by the European Central Bank.

Investors also looked ahead to a potential cooling of U.S.-China trade tensions, as the two sides gear up for talks. The benchmark Shanghai Composite Index gained 13.62 points, or 0.5 percent, to finish at 2,999.28, although Hong Kong's Hang Seng Index tumbled 285.17 points, or 1.1 percent, to 26,468.95.

Japanese shares advanced as the Bank of Japan kept its monetary policy unchanged and repeated that it would not hesitate to take additional easing measures if needed.

The central bank said it would reexamine economic and price developments at the next monetary policy meeting in October, when it updates the outlook for economic activity and prices.

The Nikkei 225 Index rose 83.74 points, or 0.4 percent, to 22,044.45, while the broader Topix ended 0.6 percent higher at 1,615.66.

Inpex rose 1 percent and Japan Petroleum rallied 2 percent as oil prices held steady in Asian trading after a two percent drop on Wednesday on data showing an increase in U.S. crude stockpiles last week. Exporters ended broadly lower as the yen rose from a seven-week low against the U.S. dollar.

Advantest, a leading manufacturer of automatic test equipment for the semiconductor industry, advanced 1.5 percent. Automaker Toyota shed 0.8 percent after announcing it will invest $391 million at its pickup truck assembly plant in San Antonio, Texas.

Australian markets finished higher as banks gained ground and energy stocks recouped losses from the previous session. The benchmark S&P/ASX 200 Index climbed 35.90 points, or 0.5 percent, to 6,717.50, while the broader All Ordinaries Index ended up 34 points, or 0.5 percent, at 6,825.20.

Banks ANZ, Commonwealth and NAB rose around half a percent each, while investment bank Macquarie Group rallied 2.4 percent. Oil and gas heavyweight Woodside Petroleum fell over 1 percent and Beach Energy declined 3.4 percent.

Mining stocks ended mixed as iron ore and copper prices declined. Gold miners Evolution and Newcrest dropped more than 1 percent after gold prices fell. Brickworks jumped 6.4 percent after the building products company raised its final dividend.

In economic news, Australia's budget returned to balance in the 2018-19 financial year for the first time since 2007-08, Federal Treasurer Josh Frydenberg said.

According to the Final Budget Outcome for the 2018-19 financial year, the budget deficit was A$13.8 billion better than estimated at the time of the 2018-19 Budget. The deficit of A$690 million represented 0.0 percent of gross domestic product.

Seoul stocks ended higher for the tenth straight day as Saudi Arabia's rapid recovery efforts helped ease concerns over oil supply and investors expressed hopes for progress in upcoming U.S.-China trade talks.

The benchmark Kospi rose 9.62 points, or 0.5 percent, to 2,080.35, with technology stocks leading the way higher. Samsung Electronics jumped 3 percent and SK Hynix added 3.1 percent.

Europe

European stocks are moving higher on Thursday after the U.S. Federal Reserve cut interest rates for the second time this year and the Bank of Japan reiterated its willingness to pursue additional easing measures to support the economy. The Bank of England also left interest rates unchanged amid Brexit uncertainty.

Earlier in the day, the Swiss National Bank pledged to remain active in the currency markets to ease upward pressure on the safe-haven franc.

Investors also looked ahead to a potential cooling of U.S.-China trade tensions, as the two sides gear up for talks.

While the German DAX Index has risen by 0.4 percent, the French CAC 40 Index and the U.K.’s FTSE 100 Index are both up by 0.6 percent.

British online trading platform IG Group has rallied after the company said its Chairman selection process is at advanced stage.

Charles Taylor shares have also jumped after private equity house Lovell Minnick said it would take the British insurance services firm private in a £261 million deal.

Instrumentation and controls company Spectris has soared as it agreed to divest BTG Group to privately held Voith GmbH & Co. KgaA for a total gross cash consideration of 319 million euros.

Swiss watchmakers Swatch and Richemont have also moved higher after the release of August month trade data from Switzerland.

On the other hand, ArcelorMittal, the world's biggest steelmaker, has come under pressure after U.S. Steel Corp cut its outlook.

Finnish engineering group Wartsila has also dropped after HSBC cut its price target on the stock. Clothing retailer Next Plc has also tumbled despite backing its full-year guidance.

On a light day on the economic front, official data showed that U.K. retail sales fell in August, defying expectations of zero growth.

Monthly retail sales volumes dipped by 0.2 percent as shoppers bought less online than the month before when major sales promotions encouraged them to splash out. The year-on-year growth rate slowed to 2.7 percent from 3.3 percent.

U.S. Economic Reports

After reporting a much bigger than expected drop in first-time claims for U.S. unemployment benefits in the previous week, the Labor Department released a report showing a modest rebound in initial jobless claims in the week ended September 14th.

The report said initial jobless claims inched up to 208,000, an increase of 2,000 from the previous week’s revised level of 206,000.

Economists had expected jobless claims to climb to 213,000 from the 204,000 originally reported for the previous week.

A separate report from the Philadelphia Federal Reserve showed a modest slowdown in the pace of growth in regional manufacturing activity in the month of September.

The Philly Fed said its diffusion index for current general activity fell to 12.0 in September from 16.8 in August, although a positive reading still indicates growth in regional manufacturing activity. The index had been expected to drop to 11.0.

Looking ahead, the survey’s future general activity index moderated but continues to suggest growth over the next six months.

At 10 am ET, the National Association of Realtors is scheduled to release its report on existing home sales in the month of August. Existing home sales are expected to dip by 0.4 percent in August after soaring by 2.5 percent in July.

The Conference Board is also due to release its report on leading economic indicators in the month of August at 10 am ET. The leading economic index is expected to come in unchanged in August after climbing by 0.5 percent in July.

At 11 am ET, the Treasury Department is scheduled to announce the details of this month’s auctions of two-year, five-year, and seven-year notes.

Stocks In Focus

Shares of U.S. Steel (X) are moving sharply lower in pre-market trading after the steel giant lowered its third quarter guidance due to a drop in steel prices and deteriorating market conditions in Europe.

Darden Restaurants (DRI) may also move to the downside after the parent of Olive Garden and other restaurant chains reported fiscal first quarter earnings that beat estimates but on weaker than expected sales.

On the other hand, shares of Herman Miller (MLHR) are likely to see initial strength after the officer furniture maker reported better than expected fiscal first quarter results and provided upbeat guidance.
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