Why A Rate Hike Will Be A Non-Event
Last week was another rough week
for the equities markets. As has been the case a lot recently,
interest rate fears caused a real sense of nervousness among market players.
This came despite a rather benign statement by the Fed on Tuesday, which
suggested that they would be very careful in a possible tightening cycle by
using the word “measured.†But interest rate fears began to surface again on
Thursday due to somewhat hawkish statements from the March FOMC minutes. Friday
was the icing on the cake, as the yield on the 10-year Note reached its highest
level in almost 2 years, on the heels of much stronger-than expected Employment
numbers. The overall damage was not too significant at first glance, as many
technology shares actually held their own. But, this was not the case for
interest rate-sensitive shares such as Homebuilders and Financials.
The June SP 500 futures
closed Friday’s session with a loss of —17.50 points, and for the 2nd
week in a row, finished at the week’s low with a loss of —10.50 points. Volume
in the ES was estimated at a heavy 986,000 contracts, heavier than Thursday’s
pace and well above the daily average. On a weekly basis, the contract lost its
Oct-Mar trend line support. Looking at the daily chart, the ES went for the
roses, breaking its trend line support, lower channel line support, and minor
Fib support. We may see a dead cat bounce from here, but next stop looks like
the March low.
The US dollar extended its reversal off of its daily uptrend line and settled back
above the 200-day MA. The Semiconductor Index (SOX) spiked above resistance,
but settled right at its 10-day MA and upper channel line resistance. June
bonds (ZB) continue to slice, dice, and julienne (whatever that means) the longs
that are still hanging on.
^Next^
Recently, more and more
pundits have come to the conclusion that all the fears over rising interest
rates are overblown. I tend to disagree with this conclusion on a longer-term
basis, simply because of all the debt households and governments are holding.
Easy credit has been the foundation of the current recovery (i.e. mortgage
refinancing), so taking away the source of all the liquidity is not to be taken
lightly. I feel there will be a point early in the tightening cycle where the
U.S. economy will not be able to handle higher rates. I’m aware that employment
is picking up, which should help to cushion the impact of higher rates, but I
don’t believe the trend of rising employment growth at the current pace is
sustainable beyond late 2004.
On a short-term basis, I
think that a lot of the rate concerns may already be priced into stock prices.
The reaction by interest rate-sensitive shares, as well as bonds, has been
abysmal in the past several weeks. I could actually see a situation where these
stocks rally on a the news of an eventual rate hike. Currently, the Fed Funds
futures are calling for an 86% chance of a 25 basis point move by the Fed in
June. This suggests to me that most players are already prepared for a
tightening, so the actual event will probably become a non-event.
Looking ahead this
week, we have a few economic reports as well as Tuesday’s quarterly dose of
“smoke and mirrors†earnings from tech bellwether Cisco System. One report that
is usually a market yawner but may get some attention this week is Monday’s
Treasury Budget, due to the fact that Greenspan has been rambling a lot lately
that the growing deficit could provide some bumps for the economic recovery.
This is followed by the PPI and Retail Sales on Tuesday, and the CPI and
Preliminary Michigan Consumer Sentiment Index on Wednesday.
Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran