Tom Essaye Quoted in CNBC on December 5, 2021

Dow jumps nearly 650 points, erasing last week’s losses as investors shake off omicron worries

But it was comments from the Fed that unnerved markets late last week, not fears about the…according to Tom Essaye, author of the Sevens Report. Click here to read the full article.

Tom Essaye Quoted in Unseen Opportunity on December 6, 2021

No “Santa Rally” for Stocks?

Super-cap tech has been well bid on the expectation of ‘forever’ low rates and support…said Sevens Report founder Tom Essaye. Click here to read the full article.

Why the Fed Could Hike Rates Sooner than Expected

What’s in Today’s Report:

  • Economic Breaker Panel – Why The Fed Could Hike Rates Sooner than Expected
  • Oil Market Update and EIA Analysis

Futures are modestly lower as markets digest the recent bounce following disappointing earnings overnight.

Earnings overnight were negative on balance as IBM missed on revenues while TSLA, LVS, and PPG also posted disappointing results and saw selling afterhours.

Today focus will be on economic data and earnings.  On the data front, the key reports will be Jobless Claims (E: 300K), Philly Fed Manufacturing Index (E: 25.0), and Existing Home Sales (E: 6.030M), and markets will want to see stability in the data (so not too hot and not too cold).  We also get two Fed speakers, Waller (9:00 a.m. ET) and Williams (9:00 p.m. ET).

On the earnings front, results have become more mixed lately so markets will continue to focus closely on earnings.  Some reports we’re watching today include: T ($0.78), AAL (-$1.04), FCX ($0.78), LUV (-$0.27), SNAP ($0.08), INTC ($1.11) and WHR ($6.16).  As has been the case, strong margins amid rising costs will be the key metric in the results.

ECB Rate Decision, June 9, 2017

How to trade ECB Rate Decision—cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. Start your free two-week trial today. 

The ECB Decision left rates unchanged, and made no changes to the QE program, as expected.

ecb rate decision

ECB Rate Decision Takeaway

The ECB met expectations Thursday, as they changed the risk assessment to “balanced,” and also removed the potential for lower interest rates going forward.

Overall, it was an anticlimactic meeting as the committee took another step towards the eventual end of QE, but gave no indication that the end of QE or rate hikes would occur sooner than was currently expected. As a result, the market largely yawned at the decision.

The euro dipped slightly on the news, despite it being a technical “hawkish” shift, and that’s because this result was already priced into the euro above 1.12. Thus, we saw a classic sell-the-news reaction.

Going forward, with the euro at current levels, whether the rally continues will depend more on US and EU economic data than anything else, as central bank policies for both the Fed and ECB are well known (the Fed should hike next week, and stick to the current guidance of three hikes for 2017).

From a bond standpoint, German bund yields dipped slightly following the statement, again a sell-the-news reaction. However, Treasury yields bounced slightly, mainly due to how short-term oversold they are. Bottom line, the ECB interest rate decision did not provide any sur-prises, and it will not cause Treasury yields to embark on a rally. Whether yields can rally from here will depend on economic data.

From an equity standpoint, I do not view this decision as negative for European stocks, and I remain bullish on European stocks via HEDJ and EZU. It’ll take a material uptick in US economic data for the euro to begin to weaken materially vs. the dollar over the next few months, but even if that doesn’t happen, the positive economic growth and continued QE should continue to put a tailwind behind EU stocks.

FOMC Preview, March 14, 2017

FOMC Preview

Federal Open Market CommitteeDespite the near-universal expectation of a 25-basis-point rate hike at tomorrow’s FOMC meeting, this meeting contains a lot of very important unknowns regarding the pace of future rate hikes. As such, this meeting is a real, legitimate risk to stocks.

Get our full FOMC preview and all the analysis you need to stay ahead of the market with the Sevens Report. In your inbox by 7am, read it in 7 minutes or less.

It is not an exaggeration to say this Fed meeting could reflect a paradigm shift in the Fed, where the Fed actually gets serious about normalizing policy and interest rates.

Very Hawkish If: 1) The Fed hikes rates 25 bps, 2) The median “dots” show four rate hikes in 2017 and 3) The median dots show four rate hikes in 2018 (currently the dots show just three for both years).

Hawkish If: 1) The Fed hikes rates 25 bps, and 2) The median dots show four rate hikes in 2017 or 2018, but not both years.

Likely Market Reaction:  Restricted for subscribers. Get this data with your free trial of the Sevens Report.

ETFs to Outperform:

Inverse bonds (TBT/TBF/PST), financials (XLF), banks (maybe, but that depends on the shape of the yield curve), TIPS-related bond ETFs (VTIP). ETFs to Underperform: Utilities (XLU), REITs (VNQ) (both interest rate plays), commodity ETFs (DBC), basic materials (XLB), energy (XLE), gold (GLD, GDX).

Meets Expectations If: The Fed hikes rates 25 basis points but the dots don’t shift in either year (i.e. the median dots still show three rate hikes in 2017 or 2018).

Likely Market Reaction:  Restricted for subscribers. Get this data with your free trial of the Sevens Report.

Dovish If: The Fed does not hike rates (this would frankly be a shocking surprise given recent Fed rhetoric). Likely Market Reaction: Stocks, gold and other commodities sharply higher (at least initially). Treasury yields and the dollar sharply lower.

Wildcard to Watch:

The Fed’s Balance Sheet. This is a bit of a confusing topic, but you’re going to be reading a lot more about this in the coming weeks, so I want to cover it now so everyone has proper context. With the Fed hiking rates, it’s quickly approaching the time when the Fed will have to naturally reduce its balance sheet. And what I and others mean by that is the Fed will have to stop reinvesting the principal that it receives when the Treasuries it owns are redeemed.

The reason this is important is because it could put further pressure on the bond market. If the Fed gets $100 million in short-term Treasuries redeemed, right now it simply buys $100 million worth of new Treasuries. But, if the Fed were to stop reinvestment, that $100 million wouldn’t go back into the bond market, removing a source of demand.

The point is that when the Fed stops reinvesting principal, that will be potentially bond negative/yield positive, and that process needs to be managed very carefully considering the size of the Fed’s balance sheet ($2.4 trillion in Treasuries, $1.7 trillion in mortgage backed securities).

Bottom line, if the Fed changes the language on the reinvestment of the balance sheet (it’ll be in the second to last paragraph in the FOMC statement) then that would be incrementally hawkish, and we’d likely see bond yields and the dollar higher, and stocks lower. The market is not at all expecting any impending balance sheet changes from the Fed this soon in 2017.

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