Stocks rise as investors as investors continue to expect that the Fed will push back tightening expectations. The S&P500 rose 1.5% to 2,023 while the Dow Jones added 1.3% to 17,142. Mixed economic data out of the US led traders to believe that the Fed won’t tighten this year. CPI fell 0.2% from the previous month and was flat on the year. Core inflation edged up 1.9% from the previous year. However most of the gains made in core inflation were attributed to a 3.2% pickup in shelter costs. Shelter costs make up 40% of core CPI compared to just 20% of the commerce department gauge that the Fed pays attention to. On the other hand jobless claims fell to 255k, which is the lowest weekly level since 1973. Today’s data continues the trend of improving labor markets with no subsequent effect on prices. Usually prices start to rise as labor markets tighten, however that relation has not held true so far in the current cycle. Harm Bandholz at UniCredit says that it supports the Fed’s view that it will be appropriate to raise in December. Markets take the other interpretation as futures prices indicate only a 27% chance of tightening in December. The dollar index rose as a result of global weakness. The euro fell 0.9% to $1.1372. A member of the ECB’s governing council appeared very dovish with an accomodative stance on policy in a speech. The 10 year yield rose 4 basis points to 2.03% and the 2 year yield rose 4 basis points to 0.60%. In emerging markets, the Russian rouble, the Turkish lira, and the South African rand rose against the dollar on delayed tightening expectations and the risk on environment today.
Investors price down a December Fed move after William Dudley exhibits a soft outlook for US growth. Dudley cites weak jobs, retail sales, and strong dollar effects as areas of concern for the economy. The ten year yield which is currently hovering around 2% reflects market expectations that interest rates will remain lower for longer. RBS strategist John Briggs says that the Fed’s chief concerns will not be resolved by December. The dollar has fallen 3.9% against the euro this week and it has also fallen against peers to reflect lower expectations. Dudley is the third board member to talk down the rate hike this week. The case to be long the US dollar in the short term is becoming less strong as monetary policy divergence is expected to hold off for the time being. ECB and BoJ meetings this month should provide more clear direction.
Walmart executives appear confident in spite of the recent selloff. This comes after earnings revisions knocked off 6-12% from EPS over the next few years as a result of increased spending on staff and investment related to ecommerce. The stock is down 10% which has left some analysts wondering whether this drop is indicative of the health of the US consumer. However most analysts are of the opinion that Walmart’s stock losses are a function of there revised outlook as opposed to economic fundamentals. Walmart has underspent in recent years in wages and training for employees which has resulted in customer service complaints. Now what could have been a headwind to growth, Walmart is resolving by investing more into their business. While this may be bad for shareholders in the short term it may be a benefit to the companies business over a longer period. Similarly Walmart is accelerating it’s expansion into ecommerce in order to challenge Amazon. An addition of $1.5bn in costs will be added from raising wages to $9-10 per hour for each employee. Another $1.1bn will be spent on ecommerce investments. It will take three years for the benefits to be fully realized. Earnings per share is expected to remain in the $4.40-4.70 range until 2019 before increasing. Annual sales growth is expected to continue to grow 3-4% through that time period. In the meantime it will be up to the company to show that these investments are worthwhile. Executives pledged to keep prices low, which will keep them competitive in the market and allow them to maintain market share.