Before delving into the technical aspects of today’s market movements, I thought that I would say a few words about the release of the Federal Reserve’s Beige Book. Early on in the session, there appeared to be significant market chatter surrounding the contents of this latest Fed release. Most of this speculation suggested that the verbiage within this latest version would imply that a larger-than-expected monetary stimulus program was under serious consideration by FOMC members due to deterioration in domestic economic conditions. As I mentioned this morning, I found it hard to believe that any new revelations could be contained in this document given the amount of time Fed members have spent telegraphing their next move. To surprise the market at this point would, in my opinion, create an additional level of uncertainty in the marketplace that the Fed, at this point, would simply like to avoid, especially with open market operations looming just over the horizon. But despite the irrationality of such action on the part of the Fed, traders spent the majority of the session selling Dollars and buying shares in anticipation of just this sort of announcement. And, strangely, once the Beige Book was released and no meaningful change in the Federal Reserve’s outlook was plain to see, markets traded largely unchanged for the rest of the session. This baffles me. Below are a few of the more meaningful comments from today’s release.
Reports from the twelve Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October.
Manufacturing activity continued to expand, with production and new orders rising across most Districts. Demand for nonfinancial services was reported to be stable to modestly increasing overall. Consumer spending was steady to up slightly, but consumers remained price-sensitive, and purchases were mostly limited to necessities and nondiscretionary items.
Input costs, most notably for agricultural commodities and industrial metals, rose further. Shipping rates increased, and retailers in some Districts noted rising wholesale prices. However, prices of final goods and services were mostly stable as higher input costs were not passed on to consumers. Wage pressures were minimal.
Demand for transportation services appears to have slowed, although reports were mixed.
From the technical side of the ledger, the pop in equity values and drop in the Dollar Index don’t appear to be the contrary indications that one might assume them to be. As noted in the charts below, the S&P 500, while significantly higher on the session, was unable to close above yesterday’s opening price. Similarly, the U.S. Dollar index, failed to close below yesterday’s opening price. This inability to put in closing values that negate the prior session’s openings is highly suggestive of a condition where, in the case of the S&P 500, sellers are proving more convicted in their positions than their bullish counterparts. And while this does not mean that the primary trends are necessarily reversing, it does show that both the stock market and the greenback are primed to take a break from their respective moves.
One other item that came to my attention today was the strength of crude oil throughout the session relative to that of gold. This 3% rally came despite a slight build in crude inventories and dwarfed the 0.83% gain seen in gold. While it’s no surprise that crude oil isn’t trading in lock step with its supply/demand profile, the fact that its sensitivity to fluctuations in the U.S. Dollar appear to be eclipsing that of gold is an interesting development. To be sure, crude has not experienced the prolonged move up that gold has seen, which should enable it to move higher more swiftly. But it now appears that crude is trading more like an inverse U.S. Dollar ETF than an energy commodity. I’m not quite sure what to make of this development at this point in time, but I thought it was worth mentioning.
With the see saw trade of the last two sessions, I'd like to think that the markets will calm down a bit tomorrow. But with jobless claims data expected before the bell and Philadelphia Federal Reserve Index numbers due out at 9:00 am CDT, Thursday shapes up as another potentially volatile day. Both gold and the U.S. Dollar will remain the focus of my energies as I believe they are the tail that wags the equity market's tail at this point. On the quarterly earnings front, tomorrow sees releases from Amazon, AT&T, and Catepillar, among others, which should have some say on how the market's trade. While I expected earnings to matter more than they have to this point, it's now clear to me that virtually all earnings data is going to be overlooked by the market until the Federal Reserve begins it next round of quantitative easing. I'd take this a step further and say that the markets, in general, are largely on hold until the Fed does its thing. This is, once again, an exercise in the markets not liking uncertainty and until that clarity is attained, this is the kind of environment we can expect.
Until tomorrow.....
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