Stocks closed higher yesterday after the FOMC meeting minutes let us know that the Fed is still hawkish…but not too hawkish. A lighter than expected Durable Goods Orders number indicates that consumers are possibly beginning to pull back.
It could have been worse! That was the driver for yesterday’s late-session rally. The Fed is not the only big elephant in the room, but it is surely the biggest these days. With such an abundance of emotional, public outpouring by Fed members lately, there is no telling what the committee discussed in private. In the minds of investors, it is quite feasible that the Fed could do something drastic, like raise rates by +75 basis points, or even more. Why? Because most investors have never witnessed inflation figures like the ones we have been seeing in the past year. Moreover, you don’t need to be an avid Wall Street Journal reader to know that inflation is high, you simply need to buy almost anything…it’s there. The Fed raised interest rates by +50 basis points earlier this month, which was largely expected. Investors are also expecting two more +50 basis point hikes, one next month and one in July, and the private musings of the FOMC confirmed that in yesterday's minutes release. So, one can say that yesterday’s afternoon rally was a sigh of relief.
There was more. The purposely convoluted wording of the minutes suggested that the Fed would become data dependent after the next 2 draconian hikes. Of course, the words didn’t read like that, but it appears that it would take something really bad to get the policymakers to veer from their path through July. Ok, so that would bring us to 1.75% - 2% on Fed Funds in July. That seems daunting but it is still well below what economists believe to be restrictive to the economy. It would therefore be a level at which the Fed can raise at a slower pace…or even lower them if the economy appears to be stalling. Both scenarios would be preferred by investors.
Adding to that hypothesis of a slightly friendlier or an outright friendly Fed is the reality that there are more and more signs that consumers are pulling back on their spending. Tuesday’s New Home Sales number showing a mid-teen decline for two consecutive months is a sign that higher interest rates and declining consumer sentiment has caused home buying to slow. Yesterday’s Durable Goods Orders number showed a slower growth than expected and just about every company reporting in the consumer discretionary sector mentioned consumption slowdown, and some even lowered their forward guidance. In addition to watching the inflation and employment numbers, the Fed is certainly paying close attention to those secondary indicators, which, in reality, are leading indicators. Given that, it is reasonable, at this point, to assume that the Fed will raise interest rates by another +100 basis points, without any material impact on the markets, in order to gain optionality, and then go into a wait-and-see (data dependent) mode. Still, the Fed is expected to continue raising rates through the end of the year, just at a slower pace. Short-term rate futures predict the possibility of just another +50 basis points of hiking beyond the next 2. That number has come down by some -30 basis points since the beginning of this month and took another leg lower yesterday. Something else that has occurred since the beginning of the month is a downturn in 10-year Treasury Note yields. You may recall that yields peaked at 3.12% in the first week of May, and currently those yields stand at 2.72%, which may be an indicator that the bond market is factoring in lower inflation and perhaps, a weaker economy in the future. At the front end of the yield curve, 2-year Treasury Note yields are more closely tied to Fed policy and they attempt to predict where short-term rates will be in 2 years. Those yields are at 2.45%, just below the neutral rate, and those yields too, have come down from 2.78% earlier this month. So, what does all of this mean for us as stock investors? First, let’s go back to yesterday’s note: you can’t fight the Fed, and the Fed is still making borrowing more restrictive and has not indicated that it has changed its policy. Beyond that, there are signs that perhaps by late summer or early fall the Fed may tone down its hawkish maneuvers, depending on the data, which has been showing signs of weaker consumption along with some recent, albeit anecdotal, signs that inflation may begin to moderate in the coming months. Is that enough to warrant jumping in with both feet and with bull horns out? No, but it may be a glimpse of light at the end of the tunnel. Keep watching, the light will start to get bigger and bigger, and we will ultimately get to the end.
WHAT’S SHAKIN’
Macy’s Inc (M) shares are higher by +13.95% in the premarket after the company reported that it beat EPS and Sales estimates by +29.81% and +0.24% respectively. The company raised its full year revenue guidance well beyond analysts’ expectations as well. Dividend yield: 3.28%. Potential average analyst target upside: +70.3%.
Williams-Sonoma Inc (WSM) shares are trading higher by as much as +9% in the premarket after the company announced strong results, beating EPS and Sales estimates by +18.42% and +4.38% respectively. Dividend yield: 2.72%. Potential average analyst target upside: +38.4%.
YESTERDAY’S MARKETS
Stocks gained after the Fed minutes suggested that the Fed was not inclined to act more hawkish than previously expected. The S&P500 climbed by +0.95%, the Dow Jones Industrial Average traded higher by +0.60%, the Nasdaq Composite Index advanced by +1.51%, and the Russell 2000 Index jumped by +1.95%. Bonds also gained and 10-year Treasury Note yields slipped by -1 basis point to 2.74%. Cryptos gave up a scant -0.01% and Bitcoin rose by +1.11%.
NXT UP