Step up to the mic

Step up to the mic.  Fed Governors stepped up to the mic and spoke up yesterday and the market didn’t like what they said.  Stocks slid yesterday as Fed speakers dampened hopes of big rate cuts and trade anxiety added to the upset.

MY TWO CENTS

1.  It’s what I do... but also what I say!  A big part of being a Fed watcher is interpreting every word spoken by the policy making body as well as the individual governors.  This interpreting becomes particularly interesting when the Fed is in a pivot mode such as they are at the moment.  The Fed’s language shifted drastically last December as Chairman Powell introduced the “patience” protocol in the wake of a rate hike and the worst December for the stock market since the great depression.  Needless to say, markets rallied on the the very words of Powell.  The big comeback in stocks was bolstered by words alone in the meetings, speeches, and policy statements that followed.  At last week’s meeting the Fed appeared to pull out the last stop and cleared a path to cut rates in its July meeting by removing the word “patient” from the policy statement.  Powell, in his press release, said that the Fed would do whatever is necessary to ensure that economic expansion continues.  That is code for: “we may cut rates”.  Markets reacted positively and many traders began to place bets on a 50 basis point rate cut as its probability soared to 43% by Monday’s close.  Yesterday, in his speech, Chairman Powell curbed market enthusiasm by stating the importance of not “over reacting”.   Also yesterday, St. Louis Fed Chief James Bullard, who was the one governor who voted for a rate cut in last weeks meeting, told a reporter that a 50 basis rate cut would be too much.  The two statements took the joy out of the equity markets and they sold off.  Chances of a 50 basis point rate cut have receded to just 26%, though there is still a 100% chance of a July cut, according to Fed Funds futures.

2.  Consumers, it’s all about the consumers.  My regular readers know of my obsession with consumers.  Their behavior, after all, is responsible for 2/3 of the US GDP.  Consumers are not always as rational as economists like to believe, but they always ultimately act in a sensible manner.  No matter what the situation with trade, rates, unemployment, immigration, etc., if the consumer gets spooked and stops consuming, the economy is in trouble.  Yesterday, the Conference Board released their June Consumer Confidence and the number underwhelmed with a miss of 121.5 representing a roughly 10 point drop from the prior month.  The number is broken down into Present Situation and Expectations for the future, and both fell in this release.  The June release is the lowest reading since September of 2017.

MARKETS

Stocks sold off on what appeared to be cautionary language from the Fed and, to a lesser degree, weak economic readings on housing and consumer confidence.  The S&P 500 fell by -0.95%, the Dow Jones Industrial Average sank by -0.67%, the Russell 2000 sold off by -0.59%, and the NASDAQ 100 dropped by -1.7%.  WHILE YOU SLEPT, stocks got a little boost early this morning from Steven Mnuchin who told CNBC that we were 95% done with a Chinese deal.  There were also reports overnight that the President was prepared to temporarily hold off on a tariff hike on $300 billion in Chinese exports.  Bonds traded up yesterday and ten-year treasury yields fell by -3 basis points to 1.98% (you read it right).

WHAT’S NXT

- The Census Bureau will release preliminary Durable Goods Orders for May which is expected to show a drop of -0.3% compared to the prior reading of -2.1%.

- Crude Oil Inventories are expected to show a further drawdown of Inventories by -2.8317 million barrels.

- San Francisco Fed President Mary Daly will speak today.

- The Treasury will auction off $41 billion 5-year notes.

- Rite Aid and General Mills announce earnings before the bell and Pier 1 Imports will release after the bell.

daily chartbook 2019-06-26