Game Day

Game day.  Stocks slid yesterday ahead of today’s big announcement as traders learned, via Twitter, that all may not be so good in Shanghai.  The Fed will drive markets today, but yesterday it was all earnings and Trump… and maybe a touch of Brexit.

 

MY TWO CENTS

 

1. five, four, three, two, one, ignition… Today is the big day where all bets on the future of interest rates will be checked.  The Federal Open Market Committee will announce its monetary policy statement after two days of deliberation at 2:00 PM EST and follow up with the Chairman’s press conference.  I have been following interest rate moves by the Fed for more than a quarter century and never have I seen so much conviction on the part of investors as I have in recent times.  Sure, bets were made, some won some lost, but those were largely speculative and made primarily by institutional traders.  One never knew what the Fed was thinking, which way they would go, or even how much rates would be slashed or hiked.  Quantitative easing and negative interest weren’t even a thing until after the financial crisis.  If you mentioned zero or negative interest rates, now the norm, you would have to wheel economists and traders out on stretchers, never mind market reaction.  Clearly times have changed.  Today, its all about the markets and what THEY want.  Fact: consumption is correlated with the stock markets.  Why?  Sure, people spend more money when they make more money and if one has money in the market, the S&P 500’s roughly +20% increase seems like a good reason to make a purchase, but even if one does not participate in the market, just knowing that markets are hitting new highs daily is enough to embolden consumers.  The Fed is well aware of this and also the fact that consumers make up two thirds of GDP, a fact that I am constantly repeating (see my next point below).  So when markets are at new highs and consumers are consuming with high hopes for rate cuts, the Fed must react.  What if they don’t act?  Well let’s leave that for another installment, but for today the Fed is likely to cut interest rates by at least -25 basis, giving the market what it wants.  The Fed has been signaling the move in speeches and in their very public projections.  The market has been signaling its desires by taking stocks to new highs and Fed Funds Futures to the projected rate.  Now it is all up to them.

 

2. You can’t ever be overconfident.  Yesterday, the Conference Board released its Consumer Confidence for July and the index came in at a far greater than expected 135.7 versus last month’s revised number of 124.3.  Confidence is rising!  Breaking down the index into its two principal components, we note that confidence on the present situation rose from 164.3 to 170.9 and expectations for the future have risen from 97.6 to 112.2.  Consumers are confident on today’s situation and believe that good times will last at least another six months.  The confidence is most likely attributed to expectations for lower interest rates clearing the path for further economic growth.  You have heard me say it time and again: a confident consumer drives the economy and a solid economy drives success in corporations whose stocks make up the stock markets.

 

THE MARKETS

 

Stocks pulled back yesterday as a likelihood for a breakthrough in trade talks between the US and China faded.  Mixed earnings had a hand in yesterday’s weak performance as did the sudden reemerged awareness of the Brexit debacle, but deeper losses were avoided as investors looked to today’s rate decision.  The S&P500 dropped by -0.26%, the Dow Jones Industrial Average fell by -0.09%, the Russell 2000 advanced by +1.06%, and the NASDAQ 100 traded off by -0.46%.  Bonds eased back and ten year yields fell by -1 basis point to 2.05%.  The 3-month / 10-year yield curve had steepened a bit in the past few weeks as rate cuts became more and more likely and remains slightly inverted at -1.6 basis points.

 

WHAT’S NXT

 

–  ADP Employment Change is expected to show that 150k jobs were created in July compared to 102k in June.

–  Chicago PMI is expected to pop back over the critical 50 mark with a 51.0 after slipping below last month with a reading of 49.7.

–  The FOMC will release its monetary policy at 2:00 PM EST and is expected to cut rates by -25 to -50 basis points.  The statement and press conference that follows will be the most highly scrutinized.

–  Before the bell Molson Coors, Johnson Controls, General Electric, and ADP will release earnings, amongst others.  After the bell releases will include Zynga, Prudential, Twilio, Western Digital, Lam Research, American Water Works, Annaly Capital Management, Qualcomm, and MetLife.

daily chartbook 2019-07-31