The Nasdaq and Russell 2000 advanced to new all-time highs on Thursday, one day after the Federal Reserve decreased the odds of a September rate hike. Biotechnology was one of the big winners, with the large cap biotechnology sector finally following the smaller stocks into record territory. Technology was weaker, hurt by disappointing earnings from Oracle (ORCL). Financials outperformed technology even though falling interest rates were a drag on the sector. Utilities and real estate, two rate sensitive sectors, rebounded following the Fed announcement.
Although the Fed didn’t make any major changes to its policy, Fed officials signaled a shift via the “dot plot”. The Fed publishes a chart showing each Federal Open Market Committee member’s target for interest rates by the end of 2015, as well as in 2016 and 2017. At the prior meeting, many Fed officials had targets above 0.50 percent, which would require two rate hikes. After this meeting, the dot plot shows the majority of Fed officials expect one cut this year, plus they lowered their forecasts for 2016 and 2017.
Inflation numbers were mixed for May. The headline number increased a healthy 0.4 percent but still slower than forecasted. Core CPI also slowed to 0.1 percent in May, down from 0.3 percent in April. Medical inflation is still running hot, but commodity inflation slowed across the board outside of energy. Oil prices were stable over the month and are virtually unchanged over the past seven weeks. This week the Atlanta Federal Reserve’s GDP Now model increased its target for second quarter GDP growth to 2.0 percent, thanks to an industrial production report from the Federal Reserve. It showed increased investment in oil & gas wells and auto and auto parts inventories. The Fed wants to raise interest rates slowly and gradually; low inflation numbers will give them the space to do that, as will moderate economic growth.
Prior to the Fed’s announcement, the futures market signaled speculators were looking for a rate hike at the October meeting. After the Fed’s statement, this was pushed back to December. The 10-year treasury is down to 2.28 percent on Friday, down from a high near 2.50 percent last week. Rate hike expectations are likely to be fluid throughout the summer, depending on incoming economic data. Since the data continues to improve, the chance for a September hike remains possible, but if the Fed only wants a hike once this year, it may decide on December in order to delay the move for as long as possible.
The markets are sanguine about the situation in Greece. Greek shares stayed above their April lows and the euro rebounded this week. However, the Greek government moved much closer to default and citizens stepped up their run on banks. Greeks are pulling their euros out of the banks ahead of a possible default. The Greek government is optimistic a deal will be reached on Monday, though the German finance minister is not. Greek’s prime minister was in Russia on Friday, trying to apply political pressure on the EU. Russian officials said they would consider aid to Greece if it is needed.
Coming into the week, stocks had been treading water in 2015. Outside of the Nasdaq, small-caps and mid-caps, the remainder of the market has generally struggled. In particular, the Dow Jones Industrial Average was down for the year only a few days ago. This long period of consolidation may be over as stocks break out to new highs, with the S&P 500 Index less than 1 percent off of its record.