Back on the Cusp of All-Time Highs - Ahead of Wall Street

By Zacks | August 20, 2014 AAA

Wednesday, August 20, 2014

Stocks are indicated to start today’s session modestly in the red. But they have recouped pretty much all of the recent losses in the last few sessions, putting the broad indexes on the cusp of new all-time highs. The Fed remains in the spotlight today, with minutes of its last meeting coming out later this afternoon and the annual Jackson Hole meeting getting underway tomorrow.

The risk in today’s Fed minutes center on the market’s dovish expectations from the Fed; investors aren’t expecting the minutes to show any new discussion that would indicate that the members may be willing to start the QE tightening process earlier than currently expected. The July 29-30 meeting whose minutes are coming out this afternoon resulted in another $10 billion cut to its bond purchases, putting the Fed on track to end the QE program by October. The consensus view is that the Fed will start raising interest rates in July 2015.

But there is a big divergence in the market with respect to the pace of interest rate normalization following the first rate hike. A still small — but growing — segment of the market believes that the Fed will take a lot longer to normalize rates than was the case in prior cycles. Proponents of this view believe that the Fed could take a six month or even a year-long hiatus from further rate hikes after the initial rate increase.

A story in today’s Wall Street Journal goes into some detail about this narrative, which is in-line with former Treasury Secretary Larry Summer’s interest rate views. We certainly see this debate show up in market interest rates, with benchmark treasury bond yields continuing to go down despite growing clarity about the coming end to the QE program and expectations of the first rate hike next summer. It will be interesting to see how the market interprets comments from Fed officials at the Jackson Hole conclave that gets underway tomorrow.

In corporate news, Lowe’s (LOW) results came short of expectations, spotlighting once again why its stock has lagged Home Depot’s (HD). The weak earnings report from Target (TGT) this morning wasn’t that surprising given the lingering effects of the data-breach issue, which had prompted it to come out with a warning a few weeks back. But the extent of the negative guidance for the rest of the year is a big disappointment that will keep the stock under pressure in today’s session. Hewlett-Packard (HPQ) will be coming out with Q2 results after the close today.

Sheraz Mian
Director of Research
 
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