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Fed Hikes Rates; Amazon Buys Whole Foods

Market Digest – Week Ending 06/09/2017
Stocks, bonds and currencies were choppy, but finished the week little changed. As expected, the Fed raised the short-term interest rate target by 0.25% and suggested the plan includes one more hike later this year. It also started to lay out plans to slowly reduce its $4.5 trillion balance sheet. Jeff Immelt stepped down as CEO of GE and Amazon announced it will purchase Whole Foods, igniting a storm of speculation on what it may mean long term for the grocery business and retail overall.

Weekly Returns:
S&P 500: 2,433 (+0.1%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.15% (-0.05%)
Gold: $1,253 (-1.1%)
EUR/USD: $1.120 (-0.0%)

Major Events:

  • Monday – GE CEO Jeff Immelt announced he would step down and will be replaced by the company’s healthcare chief, John Flannery
  • Monday – Online lender SoFi submitted an application for a bank charter
  • Tuesday – Saudi Arabia said it would cut exports to the United States to try to reduce a global oil glut
  • Wednesday – The Fed raised short-term interest rates by 0.25%
  • Thursday – Nestle was said to be looking to sell its U.S. candy business
  • Friday – Amazon said it would acquire Whole Foods for $13.7 billion. The move spurred an immediate drop in share prices for other grocers
  • Friday – President Trump said he will “cancel” Obama’s more open stance on Cuba, including returning to a ban on individually planned travel

Our Take
As expected, the Fed raised rates for the third time in the last nine months. The federal funds target rate is now 1% to 1.25%. This is good for many banks who will likely start to make more money on deposits. More of them may choose to start paying their customers interest, but they will be slow to do so.

While there is much focus on the short end of the interest rate yield curve, it is interesting to note that rates on the long end of the curve are down this year. The 10-year Treasury yield is just 2.15%, making the overall yield curve quite flat. Historically, this has been a bearish signal as banks have less incentive to lend when short rates are similar to or higher than long rates. This behavior has historically favored growth stocks that tend to raise capital with stock rather than debt. It is possible this helps explain why growth stocks have fared better this year, but yields for corporate debt remain very low, which is good for value stocks as long as they stay that way.

Regarding Amazon’s purchase of Whole Foods, we think the market’s immediate reaction to sell companies like Wal-Mart, Costco and CVS will likely prove overblown. No doubt Amazon has big plans for its biggest (by a lot) ever acquisition, and the deal will boost its already superior logistics operations. But at least for the next several years, it is hard to see a big impact on traditional grocers since Whole Foods has always been a niche market. More so than other stores, part of the point of shopping at Whole Foods is actually going to Whole Foods. Investors are extremely dour on most everything retail related except Amazon these days, so the natural reaction was to sell. Time will tell if sentiment has become too extreme – it will be interesting.

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