No Refills

No refills.  Stocks had a mixed close yesterday as the Fed decided not to change a thing.  A slide in Retail Sales growth confirmed that the recovery is slowing down even as the typically brisk holiday shopping season began.

N O T E W O R T H Y

Those engines need fuel.  Think of two jet engines, one on each wing of a massive airliner.  The airliner is the US economy and jets represents consumers like you and me and companies, large and small.  In order for that jetliner to fly, or not fall out of the sky (depending on how you look at things), those engines must be fueled and maintained.  Engine Number 1 is maintained by the Federal Government and Engine Number 2 is looked after by the Federal Reserve Bank.  That jet can fly really, really high, and once it reaches cruising altitude, it almost flies by itself slowly and efficiently using and even creating some of its own fuel. But alas, that fuel can’t last forever, and the jetliner ultimately slows down and loses altitude.  Sometimes, unforeseen events occur such as storms or bird strikes which also cause that jetliner to falter.  Well folks, that jetliner, the US Economy, was already running out of fuel as 2018 came to a close after flying non-stop since June of 2009 when The Great Recession ended.  Oh, to be sure, the jetliner didn’t fly by itself.  The Fed fueled its engine with low interest rates, QE-1 (2009), QE-2 (2010), Operation Twist (2011), and QE-3 (2012).  The Federal Government fueled its engine with TARP (Troubled Asset Relief Program) which authorized $700 billion to relieve struggling companies.  Together, the Government with fiscal stimulus and the Fed with monetary stimulus helped the US Economy to go on to the largest US economic expansion in modern times.  When the Fed recognized that its engine was losing steam in 2018, it decided to act.  First with promises of support and ultimately with a series of Fed Funds Rate cuts starting in 2019. Those rate cuts helped the economy sustain its altitude and helped propel equity and bond markets to soaring heights.  Until that unforeseen storm came at the beginning of this year.  That storm, the pandemic, would send the jetliner slamming onto the tarmac.  The Fed quickly rushed in to refuel its engine.  Those efforts started with the Fed cutting the Funds rate to 0% on March 15th of this year.  On the same day, the Fed announced that it would begin a massive QE-style (Quantitative Easing) program in which the Bank would purchase at least $700 billion in assets over several months with no limits beyond.  They further went on to lower bank lending requirements, began to purchase commercial paper directly from corporations, provided a credit facility to Primary Securities Dealers, provided a backstop for Money Market Mutual Funds, loosened bank capital requirements, provided loans directly to companies, loaned money to municipalities, purchased securities directly from dealers, and purchased securities in the secondary market from individual holders.  That is a lot of programs with lots of fancy and forgettable initials.  But they certainly got their engine back up and running.  The other engine, the ward of the Federal Government, would be fueled by the massive $2.2 trillion CARES Act, signed by President Trump on March 27th.  It took some time before the funding could get distributed and the massive undertaking meant that there would be slip ups along the way, but ultimately the fiscal action got Engine Number 1 back up and running.  The result was a quick turn-around and the jetliner was airborne once again by Q3, but with the virus still raging more fuel would be needed to sustain the airplane's rapid ascent.  The Fed at that point was out of fuel and looked to lawmakers to add more fuel to its jet in the form of further fiscal stimulus.  The Government, you see, has the ability to spend money… and tax, while the Fed can only use policy and its limited balance sheet to provide monetary stimulus.  This puts lawmakers in a very powerful, and critical position.  After many months of political wrangling it appears that lawmakers are ready to add some fuel to their engine. They appear to be getting closer, that is.  The Fed, yesterday announced that it would continue to purchase the monthly $120 billion in bonds to keep its engine going.  Chairman Powell described how the Bank saw continued but slowing growth, even upping its economic forecasts for the year.  But the Chairman warned that without action from Congress, the jetliner would head back down to the ground.  Yesterday, the US Census Bureau announced that Retail Sales for November slowed by -1.1% and revised October's formerly positive month to a losing -0.1%.  As you might guess, with the onset of the holiday season, those month’s typically display growth.  That is a sure sign that the engines need some tending to.  Further signs have appeared in the labor market with last week’s initial Jobless Claims unexpectedly jumping as fresh layoffs have resulted from a new wave of lockdowns.  The trend is expected to continue as fresh restrictions appear to be happening daily.  Today, we will get the claims number from last week and economists are expecting it to pull back somewhat to 815k from 853k, but those numbers are still higher than the average over the past several months.  After the Fed’s announcement yesterday, it is clear that they are committed to continue their efforts but have not announced any plans to add further fuel.  That leaves it up to lawmakers on Capitol Hill and in The White House.

THE MARKETS

Stocks had a mixed close yesterday as the Fed underwhelmed and Retail Sales figures hinted a slowdown in the recovery.  The S&P500 added +0.18%, the Dow Jones Industrial Average slipped by -0.15%, the Russell 2000 Index fell by -0.36%, and the Nasdaq Composite Index climbed by +0.50%.  Bonds climbed and 10-year treasury yields added +1 basis point to 0.91%.

NXT UP

- Initial Jobless Claims (Dec 12) are expected to be 815k compared to last week’s +853k.

- Continuing Jobless Claims (Dec 5) are expected to have fallen to 5.7 million from 5.757 million.

- Housing Starts (Nov) may have advanced by +0.3% after climbing by +4.9% in the prior month.

- Building Permits (Nov) are expected to have grown by +1.0% after remaining flat in October.

daily chartbook 2020-12-17