Weighing The Week Ahead: Will The Interest Rate Spike Threaten Stock Prices? -

Weighing The Week Ahead: Will The Interest Rate Spike Threaten Stock Prices?

May 17, 2015Jeremy ParkinsonFinance0

This week’s economic calendar includes the most important housing data, but the market context will prove irresistible to the pundits. Stocks continue at the top of the trading range, and even broke through for a few minutes. Even more interesting is the bond market. Interest rates decisively broke their trading range and also showed a lot of volatility.

I expect the interest rate story to have legs in the week ahead, particularly considering the implications for housing. Putting that together with the stock market trading range, the theme will be:

Will the interest rate spike pressure stock prices?

Prior Theme Recap

In my last WTWA (two weeks ago, since I took a weekend off) I predicted that market discussions would once again focus on the Fed with special attention to the employment report. That was a good call for the next week and even for the following one. There is plenty of interest in when the first rate hike will come. Better than expected employment data brought opinions about the Fed move back into the June or September time frame.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

This week’s light economic calendar competes for attention with the market context. The housing story has not been very exciting this year. Stocks continue to make new highs, to the amazement of many observers. Interest rates showed an upside breakout in spite of relatively weak economic data.

The interest rate story is a mystery, particularly for those who explain everything via Fed policy. Why the sudden spike in rates at the long end of the curve? What will happen to mortgage rates? And stocks are testing new highs. Analysts will be asking:

Will the spike in interest rates threaten stock prices?

The Viewpoints

This week’s theme is one of the most interesting we have seen this year, but it is also complicated. There is plenty of opportunity for debate. Let us split the topic into two parts – why rates moved higher and what it means for stocks.

Why the spike in rates? Here are the viewpoints.

It is all “technical” since rates broke the trading range. (WSJ. This explanation is popular, but it seems to beg the question).
The hedge funds did it. (WSJ).
There is no liquidity in the bonds (mostly thanks to central banks). John Authers (ft.com) has a nice, balanced presentation of this issue.
Regulation has increased bond volatility (Dealbook).
Demand for corporate bonds has increased, pulling up the government rates. “Davidson” via Todd Sullivan supports this idea, including the following chart:

The bond vigilantes are sending a message to the Fed.

What is the implication for stocks? More opposing viewpoints.

Stock prices will crash as bond prices rise. (Wolf Street).
Stock prices will be fine as long as underlying growth in the economy and corporate earnings continue. (Ben Levisohn, Barron’s).

As always, I have my own ideas in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

There was some good news in a very mixed week.

The JOLTs report was strong. Some try to use this as a proxy for net job gains. It is not designed for that and is also “slower” than the regular monthly employment reports. It is better to look at job openings and separations, signs of structural unemployment, and most importantly – the quit rate. (A Fed favorite). 2.8 million people quit their jobs in March. Keep this in mind when you read about a 50K “miss” in the monthly job numbers. Doug Short has helpful analysis and his collection of great charts, including this one:

Bullish sentiment hit the lowest point in two years. This is bullish on a contrarian basis. Bespoke has the analysis and this chart:

Initial jobless claims hit the lowest four-week moving average since 2000. This is the best concurrent indicator of the job market, and it continues to show strength.

Earnings and revenue growth beat expectations on a year-over-year basis. Brian Gilmartin updates his look at the data while taking out energy stocks and Apple. Very interesting and positive results for both earnings and revenue.