Trading inflation, the Fed and rising interest rates
- Issuing a Buy on and adding the SPDR S&P Bank ETF (KBE) July 2018 52.00 calls (KBE180720C00052000)that closed last night at 0.55 to the Tematica Options+ Select with a stop loss at 0.40.
Soon after adding them, we were quickly stopped out of the Costco Wholesale (COST) June 15, 2018 200.00 calls (COST180615C00200000) following the company’s latest quarterly earnings report. All in all, it was a solid report complete with the reinforced view of additional warehouse locations opening in the coming months. Even so, it appears investors were looking for more as COST shares have traded between $196-$199 over the last several days.
Moving along, the next several trading days will be interesting to say the least as we have both the June 12 trade summit as well as the Fed’s next FOMC meeting to contend with that runs from June 12-13. Exiting the 13th, the Fed is widely expected to boost interest rates, but it will also issue and update economic forecast. That update includes the Fed’s view on GDP and inflation over the coming few years.
My view on the trade summit is it is a first step in a what will likely be a long road. And like we’ve seen with the US-China trade negotiations, odds are there will be some pot holes along the way. Given the way the stock market has been trading the last several days, it appears investors have high expectations. In my experience when that’s the case, investors tend to be disappointed. Despite the likelihood for real progress, it is possible that both sides announce “feel good” or symbolic wins.
In my view, this makes the trade summit a challenging event to call, and therefore we’ll not look to trade it.
Turning back to the Fed’s FOMC meeting, we’ve seen a pick up in the number of data points confirming that yes, inflation in indeed on the rise. These span the wage growth seen in the May Employment Report to input pricing data in the May ISM Manufacturing Report, not to mention higher gas prices one sees at the pump and rising freight costs that are plaguing a growing number of companies.
To me, we’re likely to see this reflected in the Fed’s updated outlook come June 13, and this likely means the 3.5 rate hikes the Fed commented on back in March will be a firm 4 as we exit next week.
We’ve started to see the financial stocks move up over the last five days, as depicted by the 3% move in Financial Select Sector SPDR Fund (XLF). The gist is as interest rates rise, the spread the banks earn between what they lend and what they borrow expands and their net interest margins widen. While XLF includes a number of banks, such as JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC), it also contains American Express (AXP), Chubb (CB), CME Group (CME) and American International Group (AIG) and other non-bank companies. To me, the better option is the SPDR S&P Bank ETF (KBE) which holds a smattering of reginal banks (79% of assets), diversified banks (7.9%), thrifts and mortgage finance companies (7.7%) and the balance in asset managers and other diversified financial services.
Given the historical correlation between an upward move in the underlying ETF and the corresponding call options, I’m adding the SPDR S&P Bank ETF (KBE) July 2018 52.00 calls (KBE180720C00052000)that closed last night at 0.55 to the Tematica Options+ Select List. As I add this position, I’m setting a stop loss at 0.40.
- Issuing a Buy on and adding the SPDR S&P Bank ETF (KBE) July 2018 52.00 calls (KBE180720C00052000)that closed last night at 0.55 to the Tematica Options+ Select with a stop loss at 0.40.
