Odds of a December Rate Hike Move Higher

The major market indices finished the week moderately lower reflecting an uptick in ‘hawkish’ commentary from several Fed officials.

October 10, 2016    |    By Mike Schwager

Performance for Week Ending 10/7/16:

The Dow Jones Industrial Average (Dow) fell 0.37%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.79%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.67% and the Nasdaq Composite Index (NASDAQ) shed 0.37%. Sector performance was negative with 10 of the 11 S&P sector groups finishing lower. The Real Estate sector (-5.26%) was the worst performer while Financials (+1.52%) was the best.

Index* Closing Price 10/7/16 Percentage Change for Week Ending 10/7/16 Year-to-Date Percentage Change Through 10/7/16
Dow 18240.49 -0.37% +4.68%
Wilshire 5000 22397.43 -0.79% +5.81%
S&P 500 2153.74 -0.67% +5.37%
NASDAQ 5292.41 -0.37% +5.69%

*See below for Index Definitions

MARKET OBSERVATIONS: 10/3/16 – 10/7/16

The major market indices finished the week moderately lower reflecting an uptick in ‘hawkish’ commentary from several Fed officials. Odds of a rate hike at the December Federal Open Market Committee (FOMC) meeting have trended higher and currently stand at over 65%, up almost 15 percentage points from mid-September. Guggenheim believes the Fed will hike by a quarter percentage point at the meeting followed by two additional rate hikes in 2017. The path higher is still expected to be very gradual which should in turn, should leave monetary policy in a position to support risk assets. The risk to forward policy is that the US economic recovery gathers steam and inflation reaches the Fed’s 2% target sooner than expected. It is well known that the Fed does not like to surprise the market and therefore any changes to future policy decisions will likely be telegraphed well in advance.

Fed Heads: Last week, Cleveland Fed President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election. Meanwhile, Richmond Fed President Jeffrey Lacker urged the central bank to raise interest rates to head off a likely pickup in inflation that would force bigger increases later. Lacker stated “while inflation pressures may seem a distant and theoretical concern right now, prudent preemptive action can help us avoid the hard-to-predict emergence of a situation that requires more drastic action after the fact.” Lastly, Chicago Fed President Charles Evans said that the central bank will probably increase borrowing costs by the end of the year.

Oil Continues to Recover: Oil prices finished the week near the highest level in three months after government data showed U.S. crude inventories unexpectedly fell last week, marking the fifth straight weekly decline. Inventories slipped by nearly 3 million barrels in the week ended Sept. 30, much better than the 1.5 million barrel increase forecast by analysts. In addition, OPEC’s recent pledge to curb production continues to be a contributing factor to recent upside gains.

Payroll Report: According to the Labor Department nonfarm payrolls rose by 156K, below the 172K forecast by economists, but a pace that signals steady job market improvement. The unemployment rate came in at 5.0%, up modestly from last month. Wages rose 0.2% month over month and are up 2.6% on a year over year basis. The “Goldilocks” (not too hot, not too cold) report underscored a growing economy, but not at such a pace that the Fed will be inclined to hike rates at a faster than expected rate.

The growing likelihood that the Fed will tighten policy by year-end has resulted in a rotation out of the interest rate sensitive sectors into some of the more cyclical/growth sectors. Since August 1 the Utility (-9.6%), Telecom (-9.3%) and REIT (-11%) sectors have significantly underperformed the broader market due to their sensitivity to higher rates and their elevated valuations to boot. On the flipside, Energy (+7.2%), Technology (+3.8%) and Financials (+2.4%) have posted solid gains during the period. While a rate hike in December has become the consensus view, a growing risk for the defensive/interest rate sensitive areas of the market would be an upward adjustment in the Fed’s “dot plot” (i.e. a projected higher/faster path forward) if the economy gathers additional momentum.

Economic Roundup: The Institute for Supply Management (ISM) reported that its non-manufacturing (services) index jumped to 57.1 in September (readings above 50 signal expansion), the highest since October 2015. The “guts” of the report were also encouraging with the employment and forward looking new order components moving higher into expansionary territory. Service oriented business make up nearly 90% of the US economy. Meanwhile, the Labor Department reported that initial jobless claims during the week ended October 1 fell 5k to 249K, moderately below the 256K expected by economists and near the lowest level since 1973. The 4-week moving average—which helps smooth the week to week volatility—dropped to 253.5K, also the lowest since 1973.

Market View – Stay the Course: While volatility is likely to stay elevated, the path of least resistance over the coming quarters should continue to be skewed to the upside. While a pullback in stock prices certainly cannot be ruled out, a correction in prices would be viewed as healthy as it would help relieve some of the “froth” in the market and set the stage for a buying opportunity at better prices. From a macro standpoint, the US economy remains healthy, labor conditions continued to strengthen, the likelihood of a recession remains relatively low, earnings growth is set to accelerate in the coming quarters and interest rates policy is expected to remain supportive of risk assets for the foreseeable future.

The Week Ahead: Earnings season will move to the front burner as the coming week marks the first “official” week of third-quarter earnings. Fourteen members of the S&P 500 are scheduled to release results including Dow-component JPMorgan Chase on Friday. The focus of the data calendar will come at the end of the week when both the producer price index (PPI) and September retail sales are reported. Other reports of interest include the Labor Department’s August Job Openings and Labor Turnover Survey (JOLTS), the minutes from the Federal Open Market Committee’s (FOMC) September meeting, August business inventories and the University of Michigan’s October consumer sentiment survey. Eight members of the Federal Reserve will make public appearances during the week including Fed Chair Janet Yellen on Friday.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

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