Act I.

Act I.  Stocks posted a mixed close yesterday as investors awaited today’s flood of Fed information.  It was all about the Fed and easing monetary policy with investors queuing up to see the two-day show that starts today on Capital Hill.

MY TWO CENTS

1.  Global economies show more signs of weakness.  More signs that trade is having effects on global economic growth are emerging daily.  WHILE YOU SLEPT, the European Commission cut its euro-area forecasts for inflation and GDP for 2020.  Citing trade disputes, the GDP forecast was lowered to 1.4% from 1.5% and the inflation projections were lowered to 1.3%.  Germany and Italy are expected to have the worst performance with many economists expecting a recession in Germany.  The new forecast increases the likelihood that Mario Draghi will make good on his pledge to loosen monetary policy later this month.  On the other side of the world WHILE YOU SLEPT, China released its inflation figures and its Producer Price Index came in at 0% compared to the prior growth of +0.6%.  The stagnation in prices will eat into the profitability of companies, putting pressure on the already slowing economy.

2.  What to expect when you’re expecting… a rate cut.  Wall street is all in for a rate cut later this month.  According to Fed Funds Futures, there is a 95.6% probability for a 25 basis point cut and a 4.4% chance that the Fed will leave rates unchanged.  Just a week ago the numbers looked quite different with 70.8% odds for a 25 basis point cut and a 29.2% possibility for a 50 basis point cut.  What a difference a week can make in the high stakes game of predicting the Fed.  I have pointed out in my past notes that the markets have become too reliant on monetary policy predictions rather than the facts.  The over-reliance sets stocks up for downside risk should the Fed decide to wait until September to cut rates.  Employment remains strong, as evidenced by last Friday’s report, and inflation remains under target.  Below-target inflation means that the Fed has some room to ease policy but high employment usually means inflation is around the corner.  Not so cut and dry.  Today, Fed Head Jerome Powell will begin a two-day semi annual testimony on Capital Hill and EVERYONE will be watching and wanting for clues about what the Fed’s next move is going to be.  If you think he will spell it out clearly, you will be disappointed.  The Chairman will select his words very carefully, leaving the door open for anything at anytime.  Still his every word will be parsed and the market is set up for more downside disappointment than upside jubilance.

THE MARKETS

Stocks had a mixed session yesterday after rallying into the close, as investors sat in a holding pattern ahead of Powell’s testimony today.  The S&P500 climbed by +0.12%, the Dow Jones Industrial Average slipped by -0.05%, the Russell 2000 advanced by +0.8%, and the NASDAQ 100 traded up by +0.53%.  Bonds sold off marginally and 10-year treasury yields climbed by +2 basis points to 2.06%.  The US dollar continued its climb as investors lowered their rate cut expectations, much to the chagrin of the Administration, which seems obsessed with a weaker Dollar… we will hear more from them on this topic in the days ahead.

WHAT’S NXT

- At 2:00 PM EST, the Fed will release the minutes from their June FOMC meeting.  The minutes will give investors insight into which factors the committee will consider when deciding on whether to hike in July or September.

- Jerome Powell will take center stage as he begins his two-day testimony starting with the House Financial Services Committee, which will begin at 10:00 AM EST.

- Later today, St. Louis Fed President James Bullard will speak.

- The Treasury will auction $24 billion 10-year notes.

- Bed Bath & Beyond will release their earnings after the bell.

daily chartbook 2019-07-10