Stock Index Futures Interest Rates and the Dollar
By Alan Bush, Archer Financial Services
Can the bull market in stock index futures continue, in spite of the perceived headwinds of recent advances in interest rates and strength in the U.S. dollar? Many analysts believe that stock index futures cannot sustain an advance under these circumstances. We continue to maintain that this does not have to be case. It is a misconception to believe that an advance in stock index futures cannot continue in an atmosphere of increasing interest rates and a higher greenback. Our analysis suggests that interest rates, the U.S. dollar and stock index futures should all work higher in the current economic environment of accelerating economic growth.
The higher interest rate structure that we are currently seeing in the U.S. is actually a bullish influence. Rising interest rates suggest that there is growing demand for loans from businesses and consumers. Greater loan demand means stronger economic activity, an improving corporate earnings outlook and, in turn, higher stock index futures.
Most of the recent economic reports are coming in stronger than the median analysts' estimates. For example, the third quarter annualized gross domestic product was up 2.5%, which compared to an estimate of a 2.4% increase. The previous reading showed a 2% advance. Personal consumption increased 2.8%, when a 2.5% advance was anticipated.
The National Retail Federation reported that the typical shopper in the U.S. spent 6.4% more this holiday weekend than in the holiday weekend last year. In addition, retail store traffic increased 8.7% from the year ago period. Another example is the Automatic Data Processing employment change report on Wednesday that showed a 93,000 increase, when a 43,000 advance was anticipated.
There was even better news on the housing front, when the October pending home sales report showed a surprising 10.4% increase, on a month to month basis, when a 1% decline had been anticipated.
Other parts of the world are showing economic improvement, as well. China reported their purchasing managers' index for November increased to 55.2 from 54.7. This was the fastest rate of increase in seven months. The median estimate was 54.8.
Contrary to popular belief, the higher interest rate structure that we are seeing in this stage of the economic cycle is actually a bullish influence for stock index futures. It is logical that a stronger economy will produce an uptick in interest rates. The chart below illustrates the recent drop in prices for Treasury futures and the rise in yields. Even though the yield on the ten-year Treasury note is increasing, stock index futures remain firm.
U.S. 10 YEAR TREASURY NOTE FUTURES - WEEKLY CONTINUATION
Chart provided by APEX
Conventional wisdom also says that the greenback needs to be weak for stock index futures to advance. This is not always true either. For example, there were substantial gains in stock index futures in the 1990s, when the U.S. dollar was strong. Most analysts are attributing the recent gains in the greenback to a flight to quality move, in light of the ongoing financial problems in the euro zone. There are lingering concerns that the sovereign debt situation in much of Europe could spread to other financially strapped nations. There are fears that Portugal and Spain may be the next in line for financial assistance from the European Union and the International Monetary Fund. Our computer models suggest that the recent strength in the U.S. dollar is mainly due to rising domestic interest rates, which is a result of a stronger U.S. economy. This bull market for stock index will continue even if the U.S. dollar remains strong.
U.S. DOLLAR INDEX - WEEKLY CONTINUATION
Chart provided by APEX
STOCK INDEX FUTURES OUTLOOK
Wednesday's advance in S&P 500 futures was the largest in three months, as future close in on new highs for the year. Our studies place considerable weight on the shape of the yield curve, which is upward sloping. This suggests that there will be recovery in the U.S. economy, which will grow at an accelerated rate. This also tells us that we can expect the majority of the economic reports to be better than the analysts' expectations and corporate earnings will be stronger than the consensus view. Our work also suggests that the bullish influence of the recovering U.S. economy is strong enough to dominate over the bearish influence of the financial problems in the euro zone.
S&P 500 FUTURES - WEEKLY CONTINUATION
Chart provided by APEX
Expect higher prices for stock index futures for the balance of this year and well into 2011.
If you would like additional information on the financial futures marketplace, please contact Alan at 1.877.690.7303 or send an email to alan.bush@archerfinancials.com.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
