For the mid-week ending March 16, 2016, the Dow and S&P 500 continue to gain as the rally goes into its fifth week. The SPX shot up Wednesday after the release of the FOMC statement which now sees just two rate hikes (not four) in 2016 and lowered its GDP growth forecast. In other news: investors believe the next Fed rate hike will be in September; consumer prices march higher in February; and, manufacturing output rises in February.
The Fed leaves rates unchanged and sees only two rate hikes for this year. While four rate hikes were initially forecasted last December, the Fed has now lowered its forecast to just two. Also, the Fed projected a target rate for this year at a lower 0.9 percent (down from 1.4 percent) and a target rate of 1.9 percent in 2017. The forecast for GDP growth this year was reduced to 2.2 percent (down from 2.4 percent), and 2.1 percent in 2017 (down from 2.2 percent).
The Fed futures now predict the next rate hike this year will be in September. The Fed stated in its minutes that it now sees just two rate hikes, and as Fed Chairperson Janet Yellen spoke on the State of the U.S. economy, the Fed funds futures slid towards a September hike. Prices on the thirty-day fed funds futures, considered the bellwether for U.S. monetary policy changes, moved to a 52 percent probability for a September rate hike (any reading above 50 percent indicates the market’s guess for the next rate hike).
The U.S. consumer price index fell -0.2 percent, but the core rose 0.3 percent. The core CPI (excluding food and energy components) rose unexpectedly indicating that inflation is moving up and could reach the Fed goal of 2 percent annually. Medical care costs rose 0.5 percent; prescription drugs rose 0.9 percent; hospital services rose 0.5 percent; apparel rose 1.6 percent (largest gain since February 2009). On the downside, gasoline prices dropped -13 percent.
U.S. manufacturing output rose in February. Output rose 0.2 percent, which is a little stronger than the prior month while overall industrial production fell -0.5 percent (pulled down by declines in oil production and utility output). Strong demand for machinery and steel led the gain in production indicating that the slowdown in manufacturing is easing. As the dollar weakens and domestic demand grows, we can expect increased job growth.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1981 and 2074 (2 standard deviations) by this Friday.
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