Dividend stocks which are tied to interest rates have been trading under pressure in the U.S. despite a rally in the broader U.S. markets. Interest rate sensitive stocks such as Utilities and Real-estate Investment Trusts (REITs), are declining so their yields can compete with treasury yields. In the week during the Thanksgiving Holiday, Treasuries shot up to reflect a yield of 2.41%, the highest yield seen since November of 2015. [You can view the Daily Treasury Yield Curve Rates here] With a Fed likely to tighten rates in mid-December, dividend paying stocks that are interest rate sensitive will continue to trade under pressure.
Manufacturing in the U.S. continues to improve and despite mixed headlines, the early November U.S. producer sentiment surveys revealed component gains that are extending the October sentiment upturn. With expected lifts from the reversal in the U.S. inventory cycle and an oil-led upturn in the mining and factory sectors, the ISM-adjusted average of the major sentiment measures should rise to 52 in November from 51 in October and 50 in both September and August, with likely associated strength in other factory-sensitive gauges into year-end.
Trade data in the U.S. kept yields elevated. The U.S. advance trade report showed a jump to -$62.0 billion October deficit, larger than expected, from -$56.5 billion in September which was revised form -$56.1 billion. Expectations were for a -$59 billion deficits. It was -$61.5 billion a year ago. Exports fell 2.7% to $122.1 billion from $125.5 billion. Imports increased 1.1% to $184.1 billion from $182.0 billion. The data suggest a cut to Q3 GDP forecasts. Meanwhile, Advance October inventory data showed wholesale stocks falling -0.4% from -0.1% previously, while retail inventories also declined 0.4% from unchanged.
Is the FOMC is Poised to Raise Rates?
FOMC minutes show that a hike in rates is appropriate with some policymakers saying a December tightening was important to ensure the central banks credibility. That’s been the gist of Fedspeak over the last couple of months, and merely confirms the 25 basis points tightening which the market has fully priced in. The minutes to the November 1, 2 meeting showed there a variety of comments on the labor market, with some seeing it at or near full employment, with some noting the benefits of overshooting while others worried about the risks of an overheating job market.
Sentiment in the U.S. is gaining traction. The Michigan sentiment bounce to an upwardly-revised 93.8 from 91.6 in November more-than reversed the October drop to a 2-year low of 87.2 from 91.2 in September, though despite the surge the measure is still below the 11-month high of 94.7 in May and the 98.1 cycle-high in January of 2015 that marked the strongest reading since January of 2004. Survey responses from the preliminary Michigan sentiment survey predated the U.S. election, so the big boost likely reflects post-election events.
Interest Rates Sensitive Stocks are Trading on the Defensive
In the past 2-weeks, interest rate sensitive stocks such as Utilities have declined near 2.25% while Industrials have surged 11%, and financials which generally benefit from higher yields have climbed slightly more than 10%. It will be important for dividend paying stocks to increase their yield to compete with higher treasury yields. Investors who have a choice between receiving a risk-free rate of return from treasuries of 2.36%, will need a much larger yield to purchase a dividend paying stock that has market risk.