Fed likely won’t raise interest rates soon, and now that’s bad
Published: Oct 2, 2015 3:11 p.m. ET
Bad news might be bad news once again.
A weak September jobs report and a pair of downward revisions to July and August data on Friday all but extinguished market expectations for a 2015 interest-rate hike. Treasurys rallied sharply, sending yields to levels last seen in April, while stocks SPX, +1.00% suffered a kneejerk selloff. Equities moved into positive territory in early afternoon trade as a drop in the number of drilling rigs pushed up crude oil prices.
Not that long ago, disappointing data tended to ensure an equity rally as investors celebrated the prospect of lower rates for a longer period. As recently as July, stocks rallied toward all-time highs after lackluster retail sales data cooled expectations for a rate rise.
Market psychology appeared to flip in August, not long after China’s decision to devalue its currency in the wake of the country’s own stock market carnage. Since then, investors seem more focused on signs of a weakening global economy and fears that it will bleed over to the U.S.
It was readily apparent as stocks declined following the Fed’s decision not to raise rates at its September policy meeting and as the market attempted to rebound after Fed Chairwoman Janet Yellen subsequently reaffirmed that she still saw a 2015 rate move as likely. Now, data that again calls the timing of a rate move into question is sinking stocks. See: October hike ‘ruled out’ as economists say 2015 move unlikely.
The previous dynamic reflected a long-standing “disconnect” between Wall Street and Main Street, said Adam Sarhan, chief executive of Sarhan Capital, in a phone interview.
“Wall Street is ready for a rate hike but Main Street is not, and that is the underlying issue and the main reason why the Fed hasn’t raised rates yet,” he said.
Failure by data that point to a lower-for-longer approach to lift stocks would indicate monetary policy is reaching a point of diminishing returns, Sarhan said. A second dynamic is the global headwinds that have become more apparent, with Canada, Brazil, Russia, Australia and other countries in or flirting with recession.
That’s also connected with the global slump in commodities, which took a particularly sour turn in September. While slumping input prices, particularly in petroleum, were touted by bulls as a net positive for U.S. stocks, falling oil prices have tended lately to lead equities lower.
It just goes to show that context matters. The commodity slump seems to be viewed more through the prism of weak demand than oversupply. Meanwhile, U.S. consumers, while benefiting at the pump, perhaps aren’t so ready to spend the windfall.
So perhaps the worm has turned .For Sarhan, that means the market is in a “bearish phase” and that the once reliable strategy of buying dips has flipped to selling rallies.
With stocks just 6% or so off their all-time highs, many bulls are still far from throwing in the towel. But it looks more and more like they’re going to need genuine good news to facilitate a test of the highs.