Can You Feel The Doves Tonight?

Can you feel the doves tonight?  Investors loved what they heard from the Federal Reserve who over-delivered in their policy statement and Chairman Powell’s speech.  Oh yeah, and earnings were pretty good from Monday afternoon and in the pre-market.  Stocks spent the entire day in the black before achieving upward terminal velocity with the Fed release.

What you need to know:
1) The Fed made a somewhat radical shift in interest rate policy to what appeared to be neutral, surprising investors on the upside.  Stocks soared on the news with all major indexes powering forward.  Bonds also rallied on the news of a shift in balance sheet policy.

2) Earnings continue to deliver.  Apple’s earnings were not as bad as expected, as announced after Monday’s close and Boeing surprised on the upside prior to yesterday’s open.  The news from Apple gave it’s stock a +10.57% boost.  Advanced Micro Devices provided some solid guidance yesterday causing its stock to rise by +19.95%.  A tech rally ensued making the sector a winner in yesterday’s session.

3) ADP Employment change showed that 213K new jobs were added beating estimates.  The ADP report is a pre-cursor to tomorrow’s Bureau of Labor Statistics employment number and shows that the labor market continues to be strong.

4) US Chinese trade talks continue.  Hopes for a positive outcome remain as both the US and China seem motivated to find a solution.

Stocks were already poised for a positive day as former heavyweight Apple along with Boeing set a risk-on tone for the morning session.  An ADP jobs report beat also gave investors a positive nod.  All eyes were clearly on the Fed and the results of its Federal Open Market Committee policy meeting.  The Fed has been doing a good job at jawboning the market up by setting dovish expectations in recent weeks.  Since Jerome Powell first spoke of “patience”, the equity markets have rallied and predictions of any rate hikes in 2019 had all but diminished. When I was listening to the news yesterday evening, the reporter said something like “stocks rallied today as the Fed held rates steady”.  While the statement is true, it really requires lots of qualification.  So here we go.  The Fed did, in fact leave rates unchanged, which was expected and baked deeply into the market.  In their policy statement, they removed the long held words of “gradual hikes”, which was somewhat expected and highly welcomed.  It basically means that future rate hikes are no longer a given, for now.  In his press conference, Chairman Powell said that the case for rate hikes has somewhat weakened, which is pretty much as dovish as you can get.  That sounds like he is signaling that the Fed is finished hiking rates for this cycle.  The reason for the shift was, as he put it, “cross currents”.  In other words a slowdown in the global economy, the trade war, and the government shutdown have given policy makers a reason to slow down on the brake pumping.  Powell also said that the Fed would use all of the necessary policy tools to not only keep the economy in check, but to stimulate if necessary.  Huh?  He implied that rates could go either way in the future, which means that the Fed’s policy after yesterday’s meeting is neutral.  For some frame of reference, this appears to be a similar stance to the Yellen Fed in 2016.  Finally, there is the balance sheet which has been a source of much discussion lately. The Fed controls the money supply through the buying and selling of securities in the open market.  When they sell things, they tighten the money supply because cash flows out of the hands of the public.  Tightening the money supply is another tool that the Fed uses to apply the brakes to the economy and they have been doing that on a fairly rigid schedule since they began the normalization process.  They have essentially been selling the treasuries and agency bonds that they bought to bolster the economy during quantitative easing.  Yesterday, Jay Powell hinted that the selling may end sooner than planned and that they would be “flexible” in the process of managing the balance sheet, and that is another dovish signal.  With less pressure on stocks due to diminished possibilities of future rate hikes, stocks rallied.  With the possibility of the bond selling pressure to slow down if not completely end, bonds rallied.  So it was doves all around yesterday.  Stocks soared with the S&P500 rallying +1.55%, the Dow Jones Industrial Average rising by +1.77%, the Russell 2000 adding +1.05, and the NASDAQ 100 jumping by +2.64%.  Bonds rallied across the curve leaving 10 year yields at 2.67% and 2 year yields at at 2.5%.

Today, we will get Chicago Purchasing Managers index and it is expected to come in at 61.5 down from last month’s 65.4.  We will also get New Home Sales figures which are expected to have grown by +4.8% month over month versus the last reading of -8.9%.  Some interesting post-close beats last night include Facebook, Visa, and Microsoft.  Tesla missed the mark, which is probably not surprising but still worth noting.  This morning we will hear from a number of companies across broad sectors including UPS, Mastercard, Dow Dupont, Sprint, and General Electric.  Lively discussions around Fed policy will continue through today’s session.

daily chartbook 2019-01-31

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