A view of the mountains. Stocks posted a mixed close yesterday as traders awaited the Jerome Powell’s Jackson Hole speech this morning. Surprisingly weak economic news and hawkish comments by some Fed officials were not enough to douse the dovish hopes of traders.
MY TWO CENTS
- Great expectations. All eyes will be on Fed Chairman Jerome Powell later this morning when he gives his opening speech at the Fed’s annual symposium for central bankers. Traders are always keen to hear what the Fed Chief has to say, but this particular speech packs a great deal of importance. Why? Because there is so much confusion about what the Fed will do next. The Fed is usually quite good at managing expectations, having perfected it in the wake of the financial crisis. The Fed was once a secretive body in which analysts would attempt to predict a rate cut by the fullness of former Chair Alan Greenspan’s briefcase (it is actually true – you can check me on that). The bankers would meet, decide, and act with very little additional info. There were no long press conferences, dot plots, flash indicators, or speaking circuits. Today’s Fed has figured out that expectation management is actually a monetary tool itself. Want a good example? Just look at how the market took off after the late December swoon last year simply on some words by the Fed Chairman. For the better part of the first half of 2019, the Fed was doing a good job of keeping the markets comfortable simply with dovish statements. Enter the President and his twitter account from which he has been jawboning and bullying Powell into cutting rates and adding stimulus to counteract the economic drag brought on by the trade war. The President has been relentless to the point that he is now controlling the narrative on interest rates, even though he has no ability to change them. Combine Trump’s narrative with the always-hungry-for-stimulus equity bulls and you end up with very high expectations for a rate cut. It is clear to Trump why aggressive stimulus should be applied – 2020 elections. It is clear why the stock market would like a rate cut – they always want more. Unfortunately, it is not so clear to some of the FOMC members who actually vote. Yesterday, at least three governors spoke of their reluctance to see more stimulus. They believe that the economy is in good shape and expect that inflation will pick up again in the 4th quarter. The hawkish talk sent some waves through the markets. Initially, equities traded down and the 2-year/30-year yield curve inverted again. Soon after though, the sting wore off and the President tweeted that the Fed should “fight or go home”. A first grader would most likely be sent home for that type of bullying, but in the world of current-day politics it is perhaps, a reason to buy the dip. Ultimately, Powell has the power to add stimulus and his speech this morning will give him a chance to regain the narrative. With 21 days until the next FOMC meeting, expectations are everything.
- The all-knowing purchasing manager. In companies, purchasing managers have an accurate view of what is coming down the pike. They know about customer orders, equipment purchases, hiring plans, material inventories, etc. So if you want to know about the current health of a company along with its plans over the next year, you might want to buy a coffee for the purchasing manager. Actually, you would probably be better off conducting a more scientific poll of many purchasing managers across different industries and create an Index, which can be tracked. Markit is one of the most closely followed Purchasing Manager Indexes (PMI) and they publish their results monthly for not only the US, but also the Eurozone and its individual countries. I have been writing quite a bit about the rapid deceleration in US and EU manufacturing, most likely a result of the trade war. Interestingly, one of the justifications for the trade war was to protect American manufacturers, which ultimately suffered as a result of the ongoing struggle. Yesterday, US Manufacturing PMImissed expectations coming in at 49.9, which is the lowest it has been in 10 years. Index readings below 50 indicate a slowdown. It is important to note that the US economy relies more heavily on services. Yesterday’s release included Services PMI, which also missed expectations coming in at 50.9, just above the 50 mark. Both indexes are combined in a Composite PMI, which was reported at 50.9. The same number for the Eurozone came in 51.8, higher than the US! For more on how the indexes are calculated, you can read my geek-out topic on PMI’s here: https://www.siebertnet.com/blog/index.php/2019/01/02/out-with-a-bang/
Stocks were all over the map yesterday responding to Fed comments, Presidential tweets, and weak economic releases. Ultimately, hope for something good out of Powell’s speech in Jackson Hole won out helping stocks close mixed but mostly unchanged. The S&P500 dropped by -0.05%, the Dow Jones Industrial Average inched up by +0.19%, the Russell 2000 slipped by -0.25%, and the NASDAQ Composite Index retreated by -0.36%. The Financial Sector was the best performing sector, up by +0.62%, because banks like higher interest rates and hawkish Fed comments help the case. Bonds retreated and 10-year treasury yields climbed by +3 basis points to 1.63%. The 2-year/10-year yield curve inverted once again yesterday closing at -0.103 basis points in response to the hawkish Fed comments and week PMI’s.
– This morning we will get New Home Sales from the US Census Bureau and analysts expect sales to have grown by +0.2% compared to last month’s growth of +7.0%.
– At 10:00 AM EST, Chairman Jerome Powell will give his highly anticipated opening speech at the Jackson Hole Central Banker retreat. This WILL move the market.
– Foot Locker announced earnings this morning and missed Wall Street estimates by -1.3%.
– WHILE YOU COMMUTED, China announced that it will levy retaliatory tariffs on $75 billion in US goods upending markets before the open.
– Next week’s economic releases include preliminary Durable Goods Orders, housing price indices, Consumer Confidence, GDP estimates, Pending Home Sales, and the PCE Deflator. Check in on Monday for details.
Have a great weekend!
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