Major Changes Seen with the S&P and E-mini Indexes

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There has certainly been a week of changes for the ISM Manufacturing index. For the month of November, the ISM Manufacturing index was 48.6, while the prior reading was 50.1. A number that’s less than 50 points will contradict this report.

The weakest link is the manufacturing sector, amounting to around 12 percent of the nation’s economy. However, the ISM Non-Manufacturing index is the key, as it’s accountable for roughly 80 percent of U.S. jobs. The ISM Non-Manufacturing index for November was 58.2, whereas the prior reading was just over 59.

In October, construction spending was 0.1 percent, which exceeded expectations. The previous reading was 0.6 percent. The November Nonfarm Payrolls were forecasted to be 190,000; the prior reading was around 271,000.

The European Central Bank meeting was held, and the U.S. Fed Chairperson Janet Yellen spoke – two separate events that resulted in two different things: an increase in the U.S. interest rates and Euro Zone introducing additional quantitative easing.

For quite some time the stock index has been wandering sideways. During the third quarter of 2015, the gross domestic product was 2.1 percent; the previous reading was 1.5 percent. The GDP Price Index sits at 1.3 percent; previously it was 1.2 percent. Household spending is 70 percent of the GDP, which increased by three percent.

Although the Federal Reserve raised interest rates, there’s still a concern about inflation. The constantly low oil prices and the rising U.S. dollar negatively impact the marketplace. The financial community positively received news about the possibility of a gradual rate hike from the Fed.

Is the economy going to go well for the month of December? The rise depends on the data. Although, one suggestion that was made was to introduce a monetary stimulus should there be a decline in the economy.

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Image credit: CNNMoney

Yellen was clear on her desire to announce the rate hike, which always seems to be pushed back. It’s not clear how she’ll make it happen when the IMF, China, and the World Bank has asked her not to do anything until 2016. The IMF has also asked the Banks of Japan and England to continue doing what they’re doing until there are improving signs of recovery.

Yellen stressed the importance of patience, noting the risks that come with a worldwide slowdown. Another factor that comes with the decision is the transitory inflation effects. Most traders felt the first rate hike would occur in December 2015. Should Draghi have added a stimulus, it could have discouraged the Fed from raising rates.

The Euro Zone’s GDP was 0.3 percent higher than its previous reading. The U.S. dollar can get stronger after the Fed announces any rate hike. Other countries could use the currency devaluation to their benefits, which could add to the economic condition. Inflation was an important part in figuring out the next Fed policy changes. However, the Fed could meet criteria based upon the projections.

There is supporting feelings that favor the Fed raising interest rates. This increase in rate could cause the U.S. to slow down, but the consensus is that the country can better handle the hike. And, if the Fed didn’t raise it, people would see that the economy has yet to get better.

Yellen said the nation’s economy is doing quite well and, because of that, the December rate hike was a viable option. Before the announcement, she stated the move would be data-dependent but looking at forecasts for possible inflation targets that had yet to be met. She said the market and the public need to the think about the whole path of policy rates, implying that an early rate increase could lead to more steady increases over time.

According to the FOMC forecasts, the U.S. interest rates are expected to be around 1.4 percent by December 2016. The economy’s strength could increase the nation’s confidence. Stimulus that the Bank of Japan, China, and Euro Zone used could have played a part in the Fed’s decision. The recent terrorist attacks could cause European Central Bank to put together a stimulus.

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Image credit: BBC

The stimulus overseas reduces the foreign currency against the U.S. dollar, which makes for a stronger dollar. The dollar’s strength is partly to blame for the U.S.’s economic conditions, as there’s been a drop in export business and corporations with business overseas feeling an imbalance. Foreign buyers would rather not pay more for goods from the United States.

The European Central Bank’s Governing Council (ECB) met on Dec. 3 in Frankfurt to talk about its monetary policy. Mario Draghi, president of ECB, said he would do whatever he had to in order to increase inflation. Core inflation, which doesn’t include food and energy, was 1.1 percent in October – below the target rates.

Wage growth is important in getting a normal inflation rate back. Right now, the ECB is buying 60 billion euros a month in securities through September 2016.  Expectations, in regards to the ECB, is that they’ll keep a bond buying program and even have a 10-basis point reduction for the deposit rate. They could even add a stimulus.

A prediction from the Bank of England is that interest rates won’t increase in 2016 or 2017. The International Monetary Fund (IMF) made the announcement that the Chinese yuan meets the standards for the Special Drawing Rights basket. It confirms that China has met the transformations necessary to keep its SDR standing. This status will be introduced Oct. 1, 2016 with 10.92 percent of the weight making up the currencies. 41.9 percent of the basket comes from the U.S. dollar. The worldwide monetary basket is comprised of the following:

  • Euro FX – 30.93 percent
  • Japanese yen – 8.33 percent
  • British pound – 8.09 percent

There may be other countries that qualify later, but it was China with the biggest foreign exchange reserves around $3.53 trillion.

A look at the Vix index

There was a 9.05 percent drop in the VIX CBOW volatility index to under 15 (14.67). Some investors use VIX as a device to hedge their indexes or stock portfolio. VIX is actually the Chicago Board of Options Exchange Volatility Index that generally trades contrariwise to the stock indices.

Out of the 481 S&P 500 corporations reporting, 75 percent reported earnings above expectations, with 45 percent of reported sales above expectations for the third quarter of 2015. Thomson Reuters believed the S&P Companies were going to have a decrease in earnings of 4.2 percent for the third quarters. However, S&P 500 companies projected a drop of 3.9 percent in profits with a drop of 3.8 percent in revenue.

November sales for motor vehicles was 14.4 million; it was previously 14.5. Total vehicle sales hadn’t changed, sitting at 18.2 million. This has been regarded as a strength in the U.S. economy with the increase in light truck sales and the drop in crude oil prices to back it.

November readings for each sector

  • PMI Manufacturing index was 52.8; previous reading had been 54.1
  • ISM Manufacturing index was 48.6; previous reading had been 50.1
  • ISM Non-Manufacturing index was 58.2 percent, down from 59.1 percent
  • Gallup US ECI was -13; it was the same reading as before
  • Redbook Store Sales was 3.9 percent; up from 1.5 percent
  • Chicago PMI Business Barometer index was 48.7; previously it was 56.2
  • Dallas Fed Manufacturing Survey (General Activity index) was -4.9; previously, it was 12.7
  • Farm Prices dropped to -9.2 percent; previously it was -3.9 percent
  • Consumer Confidence was 90.4; previously 97.6
  • Unemployment rate was 5.0 percent; forecasters had estimated it would be 5.1 percent
  • Non-Farm Payrolls had an amazing 271,000 new jobs; previously 142,000
  • Private Payrolls was 268,000; previously it was 118,000
  • Average Hourly Earnings were 0.4 percent; previously it was zero percent
  • Average Work Week stayed the same at 34.5 hours
  • Participation Rate hasn’t changed either 62.4 percent
  • Real Third-Quarter GDP was 2.1 percent; previously it was 1.5 percent
  • GDP Price index was 1.3 percent; previously it was 1.2 percent
  • The ADP Employment November Report was forecasted for 183,000; previously it was 182,000
  • The productivity for the third quarter of 2015 is forecasted at 2.2 percent; previously it was 1.6 percent
  • The Unit Labor Costs is forecasted to be 0.9 percent; previously it was 1.4 percent
  • For the week of Nov. 28, it’s predicted the Initial Jobless Claims will be 269,000 up from 260,000.

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