Stuck in the middle

Stuck in the middle.  Stocks rose slightly yesterday as the President offered nothing new on discussions with China.  Larger morning gains were given up in response to Trump’s speech.

MY TWO CENTS

1. Should have / could have. President Trump’s speech yesterday came with high expectations.  You have read all too often my gripes about a lack of real information on the progress of trade talks.  I am clearly not alone.  Most of what we get are quick soundbites from the President as he walks to Marine One or the occasional over-embellished party line from Larry Kudlow.  Some of the statements are not designed for investor consumption but rather to send veiled messages to China.  If the President is unhappy with progress he will step up rhetoric and threaten more tariffs… to the press core.  Other times, if the President is unhappy with a weak stock market (although that hasn’t been the case recently) he will say that they are making great progress and markets usually respond positively.  A Phase One trade deal was announced on October 11th in which both sides reached some sort of tentative agreement which would ultimately lead to a more comprehensive agreement some time in the future.  Though a positive step, details of the agreement are sketchy at best.  What we do know is that China is going to purchase agricultural products from the US.  It is unclear what concessions the US will give for that.  The Chinese have been pretty clear that they are expecting some sort of a roll-back of existing tariffs.  The US has been not-so-clear about whether they will actually roll back tariffs.  The US is willing to delay raising tariffs further but that may not be good enough for China.  Yesterday afternoon, Larry Kudlow told reporters that tariff roll-backs would only be considered if a deal is signed.  Seems like we have a chicken or egg scenario.  In the President’s stump speeches he says that we are going to get a great deal from China and that the Chinese are desperate to get a deal done.  At New York’s famed Economic Club, the audience is a bit less animated than campaign rally attendees.  In his address to the Club, the President had to be a lot more selective with his wording.  After all, economists are known to rely on facts, albeit abstracted, in their analysis.  Armed with very few facts about the trade deal, the President spoke about stock market and economic performance during his tenure, numbers which are all well known to the body.  On a Chinese trade deal, the President was less bold, using statements like “could happen soon” sending the message that he is hedging himself.  So in the end, the only excitement resulting from yesterday’s speech was a delay in the New York’s Pier 11 Ferry Terminal on Wall Street to make way for the President.  All of the Marine Osprey’s flying up and down the East and Hudson Rivers were pretty cool as well.

2. What about the Fed.  In his speech to the Economic Club of New York yesterday, the President took the opportunity to speak about monetary policy to the economist audience.  Trump’s discussion on Monetary policy usually consists of him bashing the Fed and in that he was consistent in yesterday’s speech.  Trump has been quite audacious in his Federal Reserve jawboning.  When the market struggles he blames it on the Fed but when the market performs well he takes credit for its performance.  Stocks have had a great year so far.  The S&P 500 rose by some +31% (not including dividends) since the Fed shifted its policy toward easing late last December.  The Fed has since lowered interest rates in three consecutive moves by -75 basis points.  The Fed’s dovish policy has been the principal driver of this year’s rally in the stock market and remains the singular potential driver to re-ignite GDP growth going forward, a potential signed trade deal aside.  In his last speech following the latest FOMC meeting, Chairman Powell made it pretty clear that the Fed was done with their “mid cycle adjustment”, meaning that rate cuts are done for now.  Today and tomorrow Powell will be on Capital Hill to discuss the state of the economy with lawmakers.  Traders will be listening carefully for signs of future policy direction.  Based on Fed Funds futures, there is a 3% chance of another rate cut in the FOMC’s December meeting.  Markets give further rate cuts in 2020 even odds for the year.  The Fed appears to be doing its job.

THE MARKETS

Stocks traded up marginally yesterday after receiving no new information on the progress of trade discussions.  The S&P 500 advanced by +0.16%, the Dow Jones Industrial Average closed completely unchanged (which is rare), the Russell 2000 inched up by +0.02%, and the NASDAQ Composite Index traded up by +0.26%.  Bonds traded up and 10-year treasury yields gave up -1 basis point to yield 1.93%. Gold hit a new 3-month intraday low yesterday after experiencing a meteoric rise which topped off in September.  The move down reflects investors’ perception of lower risk and has some hints of complacency.

WHAT’S NXT

- CPI Excluding Food and Energy is expected to be +2.4% year over year, same as last month.

- Minneapolis Fed President Neel Kashkari and Philadelphia Fed President Patrick Harker will speak today.

- Jerome Powell will address a Joint Economic Committee of Congress at 11:00 AM EST.

- NetApp and Cisco will announce earnings after the bell.

daily chartbook 2019-11-13