Fear No More

Fear no more.  Stocks rallied yesterday as China flashed what appeared to be a wink ahead of next month’s meeting between negotiators.  Tech shares rallied, led by Apple after a favorable response to Tuesday’s new product launches.

MY TWO CENTS

1. The other stimulus.  When it comes to governments controlling economies to protect from disaster, the first thing that comes to mind by many is monetary policy.  Monetary policy involves injecting and removing liquidity, or cash (to use the slang term), into an economy.  This type of stimulus is usually controlled by a central bank which uses policy and open market operations to accomplish its goals.  The most common monetary stimulus is the movement of key interest rates.  In the US, the Federal reserve sets targets for the Fed Funds rate, which is the overnight lending rate between banks.  The Fed is not limited to interest rate policy and is constantly searching for new ways to keep the economy in check, though Fed Funds is the most commonly watched tool.  In the aftermath of the Financial Crisis, the Fed took a page out of Japan’s playbook and announced that it would begin purchasing certain types of debt securities in the open market.  They paid cash for the bonds so, in effect, they were adding liquidity to the market, thus stimulating growth.  This became known as QE, or quantitative easing.  All eyes will be on the Fed next week as the FOMC meets to decide on monetary policy.  According to Fed Funds futures, there is an 88% chance of a -25 basis rate cut, but more and more analysts are beginning to ponder some new forms of QE.  The President has certainly been pondering it and has called for the Fed to restart the program.  The EU is slightly different in that the monetary policy is controlled centrally, by a central bank (the ECB), but fiscal policy is controlled locally by member country governments.  Germany, which has the largest GDP in the EU, has been struggling economically as evidenced by a string of contracting PMI’s and slowing GDP growth.  As Germany cannot rely on the EU alone, the German government is busy enacting legislation and policy changes to stimulate the German economy.  The results can be seen in the yields of German 10-year Bunds, which while still yielding -0.5%,  have traded off there lows.  What is the message from all of this?  In the US, Lawmakers and the President have the power to enact fiscal policy in order to stimulate economic growth.  There are many tools which they can employ to prime the US economy and keep it from slipping into a recession.  Unfortunately the policies coming out of DC have had the reverse effect on the economy, slowing rather than stimulating.  The Fed is doing its job for the economy, lawmakers should consider doing theirs as well.

2.  A new chapter?  Recent economic figures from both China and the US serve as evidence that no one wins in a tariff battle.  Trade disputes are normal and certainly require attention, but tariffs, as a tool to fix trade differences have been proven over history to fail.  The Chinese economy was already slowing when President Trump initiated the first tariffs on steel back in March of 2018.  Since then the fight has intensified into a full blown trade war with escalating tariffs from both sides and has since spilled over into the currency markets.  Markets around the globe have been quite volatile over the past 6 months as negotiations stalled and restarted, only to stall again.  In the midst of it all tariffs and counter-tariffs were launched only intensifying the standoff.  Finally, two weeks ago, things appeared to be cooling off a bit as both sides agreed to have a face to face meeting in October.  Earlier in the week, rumors that China would make a large soybean purchase as a pre-condition for the upcoming meeting caused some hope for hard-hit farmers.  The stress has not been limited to soybeans, but also other agri and live stock producers.  In recent days, producers have been reporting that Chinese companies have been inquiring about pricing of US soybeans and pork.  Yesterday, in an apparent move to offer an olive branch, the Chinese government announced a list of US products that would be exempted from their latest round of tariffs.  Stocks rallied on the news.  On the list of exemptions was non-petroleum lubricants, cancer medications, and pesticides.  Absent from the list were soybeans, pork, and corn.  In other words, tariffs will still apply to those products.  The tariffs do not prevent Chinese companies from buying the products.  Though many view a potential purchase as a positive, it is most likely a practical matter.  China must feed its people and with corn and soy in limited supply, US producers must be tapped.  Adding to the stress, domestic Chinese pork suffered a massive blow this year as Swine fever has reduced domestic output.  Will these gestures lead to an end to the tariffs?  Hopefully, but any move is a positive move at this point.

THE MARKETS 

Stocks rallied yesterday as positive trade hopes spurred buying.  Technology stocks which had been under pressure earlier in the week, got a boost from a rally in Apple, which is now in the trillion dollar club once again.  The S&P500 climbed by +0.72% now less than 1% away from its all time high, the Dow Jones Industrial Average traded up by +0.85%, the Russell 2000 jumped by +2.12%, and the NASDAQ Composite Index advanced by +1.06%.  The recent upward swing in the small caps is a positive sign that this recent move in stocks may have some legs to go further.  Bonds pulled back a bit and 10-year treasury yields were unchanged at 1.73%.  Crude oil was under pressure in response to John Bolton’s leaving the administration.  A well-known Middle East hawk, his leaving has prompted many to believe that tensions in the region will pave the way for increased oil production.

WHAT’S NXT

– The Consumer Price Index excluding Food and Energy is expected to come in at +2.3% year over year up slightly from last month’s +2.2% growth.

– The ECB will announce rate policy today.  They are expected to cut key rates by -10 basis points.

– Kroger will release earnings before the bell and Broadcom will announce after the close.

daily chartbook 2019-09-12