Barely noticeable policy shift confuses and confounds

Equities traded lower yesterday as traders walked away confused over the Fed’s soft pivot. Bond markets and swaps markets challenged the Head Fed’s dismissal of rate cuts, while equity traders were not so bold.

Searching for meaning. Ok, so I got it partially correct in my yesterday’s note. I was pretty confident that the Fed was going to hike given that the market had given it the “all clear” signal in the swaps and futures markets. Anything less would have either caused a massive equity rally or an epic selloff. The rally would come for obvious reasons and the selloff due to an implication that the Fed knew something bad about the banking system and was keeping it a secret. So, the logical thing to do is to pull the trigger on a relatively small (remember when +25 basis points was meaningful) hike but promise to stop. Kind of like binging on a Big Mac, extra-large chocolate shake, and super-sized fries on the day before you start a diet. Go on, you know what I am talking about. 

That seemed logical yesterday, as it does this morning. However, it did not exactly go as planned… in practice. The Fed did, indeed, hint that the hiking may be over, which was initially met with a relief by equities. The Fed along with the Fed Boss made it quite clear, in so many words, that the banking system is healthy. This from the gang that self-admittedly let SVB and 2 other banks fail by sleeping on the job. On those failed banks and the like, the Chairman did agree with assertion that the turmoil would have the effect of tightening credit, which would help in the Fed’s fight on inflation. He mentioned something to the effect that the soft pause was made possible by the bank failures. Hmm, I am not a conspiracy theorist, but… let’s leave that one alone. Regardless of the whats and whys, bank credit is tight, and rates are the highest that they have been since 2007. Back in August of 2007 the Fed Funds rate was right where it is THIS MORNING. That was a peak, not achieved since 2001… and it was also a few months prior to The Great Recession. You know when the economy contracted and was made worse by… a problem in the poorly regulated financial sector. Folks, we live in interesting times. Chairman Powell thinks, personally, that we are more likely to avoid a recession than not. Read that again, it was intentionally vague, as was Powell’s language, which I paraphrased for you.

At the end of the day, the Fed did the responsible thing, though it may be unpopular with stock investing clubs for the moment. Inflation is still high, unemployment is lower than it was when the Fed started hiking, and the economy is still on its feet. Tight monetary policy must be maintained for as long as possible to keep the pressure on inflation. When will those high interest rates not be possible? If indeed, a recession does occur later this year. Finally, sadly for our portfolios, the Fed must leave itself some room… an option to raise further should inflation spike up unexpectedly. Let’s hope it doesn't (inflation) and it won’t (the Fed). For what it's worth, the bond markets, overnight swaps, and futures markets are signaling rate cuts later this year, the latter pointing to a Fed Funds rate ¾ percentage point lower by New Year Eve. So, its data dependent auto pilot for now. That should give us time to focus on the Banking Sector which appears to be very much NOT out of hot water yet. Stay tuned and stay focused.

WHAT’S SHAKIN’ THIS MORNIN’ ☀

QUALCOMM Inc (QCOM) shares are lower by -7.73% in the premarket after a scant EPS and Revenue beat. The company gave current quarter guidance that was below analysts’ estimates. The lower guidance is attributed to soft demand for mobile devices. Analysts expect these weaker conditions to persist through September. Dividend yield: 2.83%. Potential average analyst target upside: +23.3%.

Qorvo Inc (QRVO) shares are higher by +7.88% in the premarket after it announced that it beat EPS and Revenue estimates by +97.72% and +1.69% respectively. The chipmaker gave strong current guidance causing shares to rise. This is in contrast to QUALCOMM’s less than upbeat guidance. Slightly different customers and business models can make all the difference, which is why it is important to do your homework when selecting investments… but you knew that, because you are a regular reader. Potential average analyst target upside: +18.5%.

YOU SHOULD ALSO KNOW: Stanely Black & Decker, Planet Fitness, Paramount Global, and Carlyle Group missed on EPS and Revenues while PG&E, Regeneron, Becton Dickinson, and Moderna surprised on the upside.

YESTERDAY’S MARKETS

Stocks fell yesterday after Fed Chair Jerome Powell said that interest rate cuts are not likely this year. The S&P500 Index fell by -0.70%, the Dow Jones Industrial Average declined by –0.80%, the Nasdaq Composite Index slipped by -0.46%, and the Russell 2000 Index advanced by +0.41%. Bonds gained and 10-year Treasury Note yields pulled back by -8 basis points to 3.35%. Cryptos slipped by -0.90% and Bitcoin gave up -0.58%.

NEXT UP

• Initial Jobless Claims (April 29) is expected to come in at 240k, slightly higher than last week’s 230k claims.
• After the closing bell earnings: DraftKings, Apple, Monolithic Power Systems, Microchip Technology, AIG, Dropbox, Carvana, Lyft, Block Inc, Opendoor, DoorDash, GoDaddy, Fortinet, Bumble, Hercules, Expedia, Live Nation, Motorola Solutions, Coinbase, Goodyear, and Monster Beverage.