Stocks had a mixed close after a bumpy ride as traders tried to find good and bad in Powells words. US Manufacturing PMI stayed in the contractions zone for another month missing analysts hopes of a modest boost.
Red light, green light… sit tight. Virtually no one was expecting the Fed to cut interest rates yesterday. Even optimists were hanging their hopes on a not-too-ticked-off Fed as a best-case scenario. On the far other end of the spectrum were pessimists who were hoping for the Fed to pivot into hawk-mode. Slightly less pessimistic traders were hoping for a soft-hawkish pivot. That would be something like “we are not going to raise interest rates, but we changed our mind about the ‘appropriate to cut interest rates soon’ thing.” I can keep going, but the message here is that the distribution of opinions on the possible outcomes through year-end is left-skewed with its slightly negative mean to the left of its median and a fat, left tail. I have a group of passionate and bright friends who would ceremoniously push their specs up the bridges of their noses and say, “you don’t need a doctorate to know that the expected Fed Funds rates at the end of the year is lower.” They would even offer to show you the math and when unable to find a marker for the white board, they would tell you, “don’t worry, given what we know today, rates will probably be lower by yearend.”
Now before getting all bent out of shape and saying, “that is bold,” I want you to know that the word “probably” is not just an ambiguous word you use to keep your kid or grandkid at bay without making any commitments for an ice cream sunday. No, it is a term of art in… um, probability. Wait, why not see what economists, who are paid to opine on the matter think. I submit to you two charts. Let’s start with where 69 blue chip economists are expecting rates to be in the future.
For the most part, the mean (or average) is lower than the median (all except 1 quarter) and the trend is… down, meaning economists expect rates to be lower in the future with a bias to lower. I know that is a loose interpretation, but it should be good enough. Let’s see what the distribution of forecasts are for the end of this year. Check it out, then let’s wrap it up.
Here you go. A histogram of 69 blue chip analysts’ estimates for Q424. You can see that it is still broad, but the bulk of the observations are lower than where Fed Funds is today with a median of 5%, -50 basis points lower than today’s upper bound. That is what the experts expect. These days when you go to the freezer section of your favorite grocery, there is an entire aisle of ice cream choices. I am sure that life would be easier (as it was in the days of yore) if the choices were simply chocolate and vanilla, and if you want to get fancy, strawberry. Similarly, it would be so much less stressful if the Fed would just say up, down, or same. Unfortunately, it is not that simple when it comes to interest rates. In fact, yesterday’s really big news was that the Fed decided to slow its balance sheet runoff more than expected. That means it is easing its quantitative tightening or “QT” more than expected. Interpreting that is neither art nor science with no background in statistics necessary. It is a dovish move. Pick your favorite flavor.
WHAT IS DEFINITELY HAPPENING IN THE PREMARKET
Zoetis Inc (ZTS) shares are higher by +4.10% in the premarket after announcing that it beat EPS and Revenue estimates by +2.92% and +2.47% respectively. The company lowered its full-year guidance, but the range was still within analysts’ expectations. Dividend yield: 1.09%. Potential average analyst target upside: +30.6%.
Etsy Inc (ETSY) shares are lower by -13.51% in the premarket after the company announced that it missed EPS and Revenue targets. Loop Capital analyst Laura Champine cut the company’s rating to a SELL from a HOLD. In the past month 19 analysts have lowered their price targets while only 1 has raised. Potential average analyst target upside: +6.0%.
YESTERDAY’S MARKETS
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