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TRADING THE WEEK: Low Inflation Data Could Halt Fed Hikes
Traders Magazine Online News, August 14, 2017
Low inflation and modest job growth – two things that now might have given the Federal Reserve reason to pause in its plan to raise interest rates this year.
Trading has been a fairy established range, staying closer to the highs as investors have been reluctant to sell. Activity was reported modest as the Chicago Board Options Exchange's Volatility Index shot up 44% to its highest level since Nov. 8 at the close of trading last Thursday. The number of puts and calls traded that day hit a record 2.6 million.
“It’s been a quiet summer but there is some business getting done, as volatility ticked up and guys are setting up for the last two weeks of summer and vacations,” said a New York floor trader.
Looking at the data, the Labor Department reported consumer prices edged up 0.1 percent in July following no gain in June. Inflation has risen 1.7 percent over the past 12 months, indicating there is no real inflation pressure that could hurt the economy. This, some said, could limit the Fed’s desire to raise interest rates again this year as it had previously stated it wanted to.
“They (the Fed) will have to see some spurt in the inflation data to get that third rate hike in,” the floor trader said.
William Mingoine, Head of Equities at Drexel Hamilton in New York agreed that the benign inflation numbers are indeed weak, putting rate raises in question.
“U.S. Treasuries were higher last week in a flight to quality trade,” Mingione said. “The Korean tensions have sent the VIX to a 9- month high. It was an interesting week to say the least. Markets have traded on the Trump Administration goals coming to any sort of fruition but some of the optimism is settling down and causing the equity markets to continue to sell off.”
And though the markets were a bit weaker, he added that record high U.S. corporate earnings are allowing the valuations to also move higher to record highs.
“The selloff we are seeing is not shocking as Korean tensions continue to mount,” he said. “The tech space is leading the charge sending the Nasdaq to its worst three-day slide since November.”
Looking back at last week, trading volume was 6.38 billion shares, off slightly from the 6.58 billion shares reported two weeks ago, according to BATS Global Markets.
This week Mingione said the markets can look forward to a few economic numbers such as GDP, jobless claims and the FOMC Minutes from July policy meeting but little else. He expects more market meandering than much else.
“I don’t expect any of these economic data points to influence the market as the geopolitical issues will continue to dominate the market through next week,” Mingione concluded.
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