Fed reaction to data barrage is focus for stocks

Fri May 27, 2016 8:14pm EDT
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By Rodrigo Campos

NEW YORK (Reuters) - Data on inflation and employment, two of the economic indicators most important to a "data-dependent" U.S. Federal Reserve are expected next week.

While Fed policymakers will be looking at those numbers as they decide whether to raise key interest rates as soon as June, traders will read through them to try and get ahead of the Fed decision.

For most of the current bull market, stocks have sold off on expectations of tighter monetary policy. But they rose sharply over the past week as Fed-speak turned more hawkish.

The Fed has remained constant in using economic data to decide whether to raise the Fed funds rate. On Friday, Fed Chair Janet Yellen said that if current economic conditions hold, a rate hike over the next few months would be "appropriate."

However, stocks have not yet priced in a rate hike in June or even July, according to analysts at Bank of America/Merrill Lynch.

"The vast majority of 'hawkish' industries (which have outperformed when rate hikes have been pulled forward by the market) are still cheap, while most 'dovish' industries (which have outperformed when rate hikes have been pushed out) are still expensive," the bank's analysts said in a Friday note.

They list consumer finance, banks and insurance among industries that appear cheap while beverages, real estate investment trusts and electric utilities still rank as expensive even though they benefit from policy the Fed seems to be walking away from.

Financials led the way on the S&P 500 on Friday. If next week's data continues to point to a hike from the Fed, banks will likely continue to outperform, as higher interest rates mean increased returns for lending, the core of their business.   Continued...

A street sign is seen in front of the New York Stock Exchange on Wall Street in New York, February 10, 2009. REUTERS/Eric Thayer