Bulls vs Bears. The old-as-time battle between the legendary Wall Street spirit animals continued yesterday with Bulls on top… but it was not clear who would win earlier in the session. Stocks continued their rocky path yesterday starting the session on a strong leg but gave way to mid-session selling which was ultimately quashed by late session buyers who managed to bring the indexes to their session highs at the close. Renewed optimism, or rather less pessimism about the Chinese trade conflict after Presidential comments empowered the buying for most of the session. Additionally pre-market earnings were not as negative and the Consumer Confidence number came in above expectations. Combine these with the still oversold conditions in the market and we have a winning day for stocks. We are not quite out of the woods yet as all of the major indexes are still risk off as the S&P is up just +0.3% and the Dow Jones is up +0.6 year to date. With more earnings to come and mid term elections less than a week away continued volatility is the only thing that is a high probability prediction. The battle between the Bulls and Bears is not the only fight affecting markets these days. In recent weeks the President has been in a mostly one-sided battle with the Federal Reserve in which he has blamed them for the recent fall in the stock market in an effort to jawbone them into slowing their pace of rate hikes. To put things into perspective, all past administrations attempt to exact some level of pressure on the Fed to keep rates low. After all, voters like low interest rates. So this Administration’s pressure is nothing unique, although I am pretty sure that no other past President actually publicly mocked his Fed chair. The Federal Open Market Committee will meet next to ponder a rate hike and while they are largely expected to keep rates steady, there is still a 77% probability of a 25 basis point hike in December. Ever wonder what the FOMC is? Because it is geek-out Wednesday, I am going to tell you.
The Federal Reserve Act of 1913 charged the Federal Reserve with the responsibility to control Monetary Policy. The Fed utilizes this monetary policy to stabilize the US economy to ensure that inflation remains under control and employment remains healthy. This is often referred to as their “duel mandate”. The Federal Open Market Committee (FOMC) is the Fed’s policy making arm and it consists of twelve voting members. Five of the twelve are the members of the Fed’s Board of Governors and the other five are a subset of Federal Reserve Bank presidents. As there are 12 Federal Reserve Banks, voting members rotate on an annual basis for 4 out of the 5 remaining seats. The President of the New York Federal Reserve Bank (currently William Dudley) serves as a permanent voting member and acts as the Vice Chairman. The FOMC is chaired by the Chairman of the Fed Board of Governors, who is none other than Jerome “Jay” Powell (it was formerly headed by Janet Yellen). The Committee meets eight times a year around every six weeks or so to discuss and vote on policy. The chairman will hold a press conference after four of the meetings to discuss projections and policy decisions. Though the FOMC can technically make policy as often as necessary, they generally change policy during the meetings that feature press conferences. These are referred to as “live” meetings. The FOMC utilizes three tools to influence monetary policy: 1) open market operations, 2) the discount rate, and 3) reserve requirements. They use these 3 tools to set the Federal Funds Rate, amongst other things. The Fed Funds Rate is the overnight rate at which banks lend funds between themselves. The Fed also controls the Discount Rate, which is the rate it charges banks who borrow funds from them in order to meet reserve requirements, which it also sets. Open market operations involves the Federal Reserve’s buying and selling of securities in the open market in order to manipulate the money supply. If the Fed wishes to expand the money supply and stimulate the economy, they will purchase securities from the public thus adding Federal dollars to the supply. If they wish to restrict the economy, they will sell securities, thus taking money out of supply. Seems like a lot of work, and it is! Though the meetings are held in secret, minutes are released about 3 weeks after the meeting and they are always parsed over by investors hoping to find hints of future policy. Additionally, the Fed has made a concerted effort in recent years to be more transparent with their projections and proceedings. This effort, in and of itself, can be used as a policy tool because markets do, in fact, respond to information which is made public. So now you know why the Fed is so important and why all eyes (even the President’s) are on them.
Today, we will receive a number of pre-market earnings releases, which can, as in prior sessions, influence the mood of the day ahead. Last night, Facebook announced its earnings and beat on earnings while missing its revenue expectations. Though it vacillated wildly in the after market, it is currently trading higher in the pre-market, which should serve to give the tech heavy NASDAQ a boost for the open. Also this morning, we will get MBA mortgage applications, the ADP employment change (expected to show an increase of 187k jobs), and the Chicago Purchasing Managers index (expected to be 60.0 versus last month’s 60.4). Lots of good stuff to stimulate another contentious day of struggle between Bulls and Bears, buyers and sellers, red and blue, and finally President Trump and Chairman Powell.