Small bumps in the road. Stocks closed mostly mixed and bonds fell yesterday as investors weighed a number of newly emerging risk factors. Stock indices spent most of the session in the red as a steady stream of questionable reports built up into a new wall of worry.
WHAT YOU NEED TO KNOW:
1) Talks between President Trump and North Korean Leader Kim Jung Un appeared to have failed. WHILE YOU SLEPT the two leaders abruptly ended their highly publicized summit in Vietnam. Few details are available at this point but it appears that Trump did not like a take-it-or-leave-it Korean offer.
2) India and Pakistan tensions continue to escalate. Yesterday, traders were dealing with news of an Indian airstrike in Pakistan on Tuesday and WHILE YOU WERE STUCK IN TRAFFIC in yesterday’s evening commute, sketchy reports began to emerge regarding Pakistan shooting down an Indian MiG 21 Fighter and capturing its pilot. Early this morning a news report suggested that the held Indian pilot would be released on March 1.
3) Jerome Powell’s testimony to the House Finance Committee sent mixed signals to traders. Specifically fixed income investors who were confused about Powell’s revelation that the Fed is considering other ways of targeting inflation. Bond traders viewed this as the Fed potentially allowing the inflation to go over the longstanding target of 2%. If bond investors are expecting inflation, they need to get higher yields and higher yields mean lower prices. Bonds sold off on that bit of testimony yesterday.
4) Is a deal with China really a lock? US Trade Representative Robert Lighthizer told congressional lawmakers that there is still a lot of work required to reach an agreement with China.
5) In an emotionally charged testimony yesterday, former Trump lawyer Michael Cohen provided interesting new details on some of his former boss’ dealings. Though there was plenty of drama, some clear lines of questioning began to emerge which may cause some legal trouble for the President.
Stocks spent the better part of yesterday’s session climbing out of an early session sell off as traders digested one bit of confusing news after another. Ultimately, equity indexes were able to close mostly unchanged despite early deficits. The S&P500 closed down by -0.5%, the Dow Jones Industrials fell by -0.28%, the small cap Russell 2000 rose by +0.23%, and the NASDAQ 100 slipped by -0.09%. All of the major indexes are sitting right on or below key resistance lines which has contributed to the pause in the recent climb. Bond traders had a busy session yesterday as they contemplated Chairman Powell’s testimony on Capital Hill. Since word that the Fed was considering slowing down or even ending its balance sheet normalization began to circulate, bonds have rallied somewhat. Recall that normalization means that the Fed is selling bonds in the open market in order to shrink the money supply. From the perspective of bond traders, if the Fed stops selling bonds there is less supply and sell pressure, which is ultimately bullish for bonds. While the Fed has not officially stated its balance sheet policy change yet, the discussion has many economists wondering what the Fed may be seeing that would cause them to halt their methodical liquidation process leaving them with a still bloated balance sheet. If that is not causing enough confusion, Powell hinted that the Fed was considering alternative ways to cap inflation. The discussion around alternative models led bond traders to the conclusion that the Fed is figuring out how to relax its 2% inflation target in order to avoid more rate hikes. Higher inflation means higher yields and bonds sold off on the news. The 10 year treasury yield rose by 5 basis points to 2.68% yesterday and the aggregate bond market fell by -0.26%. To learn more about bonds and inflation, read my note on the subject here: https://www.siebertnet.com/blog/index.php/2018/09/19/trade-war-of-words/ .
WHAT TO LOOK FOR TODAY:
This morning we will get the delayed 4th quarter GDP figures from the Bureau of Economic Analysis and the top line GDP number is expected to have grown by +2.2% quarter over quarter, down from last quarter’s +3.4% growth. Core quarterly PCE is expected to be 1.6%, flat from last period. Later this morning we will get the regional Chicago Business Monitor Index and it is expected to come in at 57.5 versus last month’s 56.7. Before the bell we will get earnings from Nielsen Holdings, PG&E, and JC Penney, amongst others. After the bell earnings releases include AMC Entertainment, Splunk, Dell, Nordstrom, Gap Inc, and Marriott International.
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