TRADING THE WEEK:  Not When, But How Much?

Traders Magazine Online News, March 13, 2017

John D'Antona Jr.

Twenty-five or 50? Basis points, that is.

Last week the U.S. equity markets got what traders are saying was the final piece of the interest puzzle – U.S. jobs data which saw payrolls rise 235,000 – the second straight monthly gain – which translates into a near-100% market certainty that the FOMC will raise rates later this week. Expectations were for a rise of 188,000. Last week, futures pointed to an 85% to 90% chance of higher rates – and that was for a 25 bps hike.

But will Wednesday’s announcement push rates 25 bps higher or a more dramatic 50bps?

Larry Peruzzi, managing director, international equities sales/trading at Mischler Financial Group, told Markets Media that he hoped that the month of March does not go out like a bear, after coming in like bull. He noted how on March 1 the Dow, S&P 500 and Nasdaq composite all closed at record highs, but over the next 6 trading sessions the S&P declined on 4 of 6 days and had very small gains on the 2 other days. Furthermore, last Thursday the bull market celebrated its 8th year with gains of between 1bp and 8 bps in U.S indices.

“But after eight years markets seem to be both tired and excited,” Peruzzi said. “Valuations are starting to be questioned but expectation of job growth and tax relief has few ready to sell but an equally few are ready to jump in. So, markets feel as though we are currently in a stalemate.”

But now with Friday’s February employment report and its gains the market is pondering a higher-than-originally-thought interest rate hike, he added. This is backed up by last Monday’s Factory Orders data that exceeded expectations, Wednesday’s ADP employment change that outperformed estimates by a healthy 112K and Thursday’s import prices which showed inflation seems to be under control.

Trading on U.S. equity exchanges was reported at an average 6.76 billion shares for the week ended march 10, down from the 7.46 billion shares per day for the week ended March 3, according to Bats Global Markets data.

“Looking to this week investors will have plenty to digest. We get a good view on inflation with Tuesday’s PPI report for February and Wednesday CPI report for February. Wednesday’s retail sales figures will give us a clearer picture as to how much of the surge in household wealth has push through the economy,” Peruzzi said. “Fed Funds are actually pricing in a 100% probability of a rate increase.”

But Peruzzi didn’t rule out a larger hike. And neither did others.

According to CNBC reports, UBS upped its view to three rate hikes from two, and NatWest Markets went from two to four.

In other market news, Greenwich Associates reported that institutions are allocating their increasingly scarce resources to fixed income pursuits and technology. Why fixed income? Why not equities or options or foreign exchange?

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