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Before the Bell: Stocks set to rise ahead of Fed decision

The Before the Bell report is compiled by editors of The Globe and Mail and is updated throughout the morning to reflect latest developments. Colin Cieszynski, Chartered Financial Analyst and Chartered Market Technician, is chief market strategist with CMC Markets.

The calm ended and the storm arrived with three big central bank meetings on today. Stock markets are soaring after the Bank of Japan made a number of adjustments to its monetary stimulus program. The Nikkei rallied 1.9 per cent, led by its banking sector. The Dax is up 1.2 per cent while the FTSE is up 0.3 per cent. U.S. index futures are also up this morning ahead of the Fed rising 0.4 per cent to 0.5 per cent with the Nasdaq outperforming again.

Traders applauded the Bank of Japan's decision to shift the focus of its stimulus program to yield curve management. While maintaining its annual asset purchase target of 80 trillion yen and its (0.1 per cent) short-term rate, it committed to driving down the rate on 10-year bonds to zero and dropped a duration target giving it more flexibility.

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The yen initially dropped on the news but then made it all back and has been trading higher on the day. This suggests the Street sees this decision to reshuffle rather than increase purchases as indicating the bank is nearing the limits of how much stimulus it can provide for now with yield curve management like the U.S. Federal Reserve's Twist operation of a few years back. This also means whatever the Fed decides to do today, the Bank of Japan won't be standing in the way. For what it's worth, the Bank of Japan would probably prefer to see the Fed raise rates which would boost the U.S. dollar because the higher yen this year has been working against Japanese stimulus efforts.

Two factors have emerged overnight that could influence Fed thinking as its big decision approaches. First, the OECD cut its global gross domestic product growth forecast to 3.1 per cent from 3.2 per cent and its U.S. forecast to 1.4 per cent from 1.8 per cent, which could make the Federal Open Market Committee (FOMC) think twice about raising rates. On the other hand, a big 7.5-million-barrel drop in American Petroleum Institute (API) crude oil inventories indicates strong demand and weak supply in the U.S. market. West Texas Intermediate oil has jumped 2.1 per cent overnight back up to $45 (U.S.).‎ Generally speaking, the oil price has stopped falling and that's easing deflation fears. Increases above $50 could add to inflation pressures down the road, so oil actions suggests the Fed could still raise rates this year.

The two-day Fed meeting wraps up at 2 p.m. EDT today with a  big interest rate decision, statement, member projections and press conference. The Street, along with me, think the Fed will hold off on a rate hike for now but signal toward an increase in December. Signals could include a higher number of hawkish dissenters, increases to the GDP or inflation forecasts, the dot plot of Fed Funds rate forecasts or other means. Traders may also look to the dot plot for signs longer term rate expectations are coming down as members have been talking down the neutral rate for this cycle toward 1.00 per cent to 1.25 per cent, which may be seen as dovish and could balance off short-term hawkishness.

Two of the Fed's primary dealers think, however, that the Fed could surprise with a rate hike now. Given the increased hawkish talk of late from FOMC members, including a lowering of the job creation threshold needed to act, there still remains a sizeable enough chance of a surprise increase that traders remain wary, particularly after so many got caught totally offside following the Brexit vote back in June. If we were to get an increase now it could be seen as catchup for the one they should have done in June but held off due to the Brexit vote.

Although the Fed is supposed to be neutral and tries to stay out of politics, today's decision could have implications for the U.S. election, which is split even more than usual between continuity and change. The Fed would normally prefer to wait until December after the election but it has been accused by the Republican campaign of keeping rates low to help the Democrats. Signalling could also be important. A rate hike coupled with positive talk about the economy could help the Democrats, while holding off due to a soft economy could dredge up accusations current policies aren't working and change is needed. In other words, regardless of what they do, today's decision could have political implications.

At the moment, the Street is expecting the Fed to stand pat. A surprise rate hike could spark a rally in the greenback and undermine stocks. A hold-and-hint toward December would be seen as in line with expectations. A hold and a dovish surprise,  like thoughts of pushing a hike off to next year, could crush the greenback and boost stocks.

Later in the day, focus may turn to New Zealand as traders prepare for a Reserve Bank of New Zealand meeting, with the decision coming three hours after the FOMC news. With inflation picking up, Purchasing Managers' Index numbers mixed, and Reserve Bank of Australia minutes indicating neutral policy across the Tasman Sea, the RBNZ can afford to pause after cutting rates for the second time this year at its last meeting.

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Now, here is a closer look at what's going on this morning and what is still to come.

MARKET DATA:

Futures (as of about 7:15 a.m. ET)

Dow +0.45 per cent; S&P 500 +0.46 per cent; Nasdaq: +0.56 per cent; TSX 60 +0.43 per cent

Equities
Japan's Nikkei +1.91 per cent
Shanghai composite index +0.08 per cent
Hong Kong's Hang Seng +0.59 per cent 
Germany's DAX +1.254 per cent
London's FTSE +0.39 per cent
France's CAC 40 +1.41 per cent

Commodities
WTI crude oil (Nymex Nov.) +2.09 per cent at $44.96 (U.S.) a barrel
Gold (Comex Dec.) +0.46 per cent at $1,324.20 (U.S.) an ounce
Copper (Comex Dec.) -0.62 per cent at $2.15 (U.S.) a pound

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Currencies
Canadian dollar +0.24 at 75.99 cents (U.S.)
U.S. dollar index -0.03 at 95.98

Bonds
Canada 10-year bond yield +0.404 at 1.16 per cent

KEY ECONOMIC RELEASES

Bank of Japan monetary policy meeting
Japan trade balance and department store sales

(8:30 a.m. ET) Canada wholesale trade for July. Estimate is unchanged from June.

The value of Canadian wholesale trade rose in July for the fourth consecutive month, posting a 0.3-per-cent gain on strength in the motor vehicle and parts subsector, Statistics Canada said on Wednesday The increase was slightly more than the 0.2-per-cent month-on-month advance predicted by analysts in a Reuters poll. Sales climbed in five of the seven subsectors, representing 72 per cent of total wholesale sales. In the motor vehicle and parts subsector, sales as a whole rose by 2.0 per cent, thanks largely to a 3.0 per cent jump in sales of motor vehicles. Sales in the food, beverage and tobacco subsector edged up by 1.2 per cent.


(10:30 a.m. ET) EIA petroleum status report
(2 p.m. ET) U.S FOMC announcement and summary of economic projections. Followed by chair Janet Yellen's quarterly press briefing at 2:30 p.m.

KEY STOCKS TO WATCH

TMX Group Ltd., Canada's largest stock exchange operator, is cutting 10 per cent of its work force as part of an ongoing effort to reduce costs. In a statement released after the close on Tuesday, TMX said it intends to eliminate roughly 115 positions, 95 full-time staff and a further 20 consultants and contractors. As of June 30, TMX had 1,173 employees. Most of the job cuts will be rolled out by the end of the first quarter of next year. TMX will take a charge of up to $17-million due to severance costs in connection with the layoffs.

**

Canadian Imperial Bank of Commerce, Canada's fifth-biggest lender, has formed a strategic partnership with National Australia Bank (NAB) and Israel's Bank Leumi to work on new innovations.

**

The chief executive of Wells Fargo & Co. – where bankers opened secret and unauthorized credit card and deposit accounts for customers for at least five years in an attempt to meet sales goals – told a Senate panel Tuesday morning that the illegal activity might have gone on even longer and that no senior executives had been fired as a result. JPMorgan Chase downgraded the bank to "neutral" from "overweight."

**

Royal Bank of Canada's asset-management arm launched four new exchange-traded funds that tap into strong demand among investors for regular income – and executives aren't ruling out using the funds to create a bank-owned robo-adviser in the near future.

**

Microsoft's shares rose 1.21 per cent to $57.50 (U.S.)  in premarket trading after the software maker raised its quarterly dividend and said it would buy back up to $40-billion in stock.

**

Adobe Systems rose 4.7 per cent to $105.35 (U.S.) after the company reported quarterly revenue that beat market expectations.

**

Skechers was down 3.6 per cent after Morgan Stanley downgraded the shoemaker's stock to "equal weight" from "overweight".

**

Etsy's shares were up 2.7 per cent in premarket trading after it was upgraded to "buy" from "neutral" by Monness Crespi Hardt after Etsy announced it was buying privately held Blackbird Technologies, a company with search relevance and recommendation technology.

**

General Mills Inc. reported a drop in quarterly net sales for the fifth straight quarter, hurt mainly by weak demand for its Yoplait yogurt and Progresso soup and the sale of its Green Giant frozen vegetable business. The maker of Cheerios cereal said net earnings attributable to the company fell to $409 million, or 67 cents per share, in the first quarter ended Aug. 28 from $426.6 million, or 69 cents per share, a year earlier. The company's net sales fell 7 percent to $3.91 billion.

**

FedEx is raising prices, boosting earnings and making plans for handling the crush of holiday packages. Company executives said late Tuesday they expect to hire more than 50,000 holiday-season workers after adding 55,000 last year. They forecast another record holiday shipping season, thanks to continuing growth of online shopping. Peak loads are expected on the last four Mondays before Christmas.

Over the summer, FedEx earned $715-million in the latest quarter, up 3 per cent from the year before. The results beat Wall Street expectations.

**

Adobe Systems Inc. reported a better-than-expected 20 percent jump in quarterly revenue as its Creative Cloud package of software tools attracted more users. Adobe -- generally conservative with its forecast -- said it expects fourth-quarter revenue of $1.55 billion-$1.60 billion. Analysts on average were expecting $1.57 billion, according to Thomson Reuters I/B/E/S.

Earnings include: Bed Bath & Beyond Inc.; Carmax Inc.; General Mills Inc.; Jabil Circuit Inc.; Red Hat Inc.

With files from wire services

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