Doves in the House

Doves in the house.  Yesterday, stocks closed mostly unchanged, but not without a bit of turbulence. The highly anticipated FOMC meeting minutes were released midday which, for the most part, confirmed the market’s view of the dovish Fed.


1)  According to yesterday’s FOMC meeting minutes, the Fed governors unanimously voted to shift monetary policy to neutral in their last meeting.  There were differing opinions on how long the pause would last and what might trigger a change, but there seemed to be consensus that the downside risk of a pause would be limited due to under control inflation.  The dovish minutes were met with a muted market response because the text was mostly consistent with recent Fed speakers.

2)  The Fed will most likely stop normalizing its balance sheet this year.  Yesterday’s minutes release confirmed that the selling of Fed-held assets would likely end later this year.  The halting of the sales is a policy tool which would be accommodative and is consistent with the newly revised policy.  The logic behind the policy move is for the Fed to retain sufficient liquidity to deal with a potential economic slowdown.  To learn more about the fed balance sheet, read my note on the topic here:

3)  A trade deal with China is looking more and more likely as the two sides have been able to make headway on the framework for a broader deal.  The pending deadline of March 1st will most likely be extended.

4) Europe is next.  As reported here over the past few days, the Administration is stepping up the rhetoric on the EU starting with Automobile imports.  Yesterday’s meeting between Trump and Austrian Chancellor Sebastien Kurz was described as being contentious.

Markets got what they needed in yesterday’s FOMC minutes: a confirmation that the Fed is not likely to raise rates anytime soon.  Anything short of that would have spelled disaster for the market as the majority of the recent moves was driven by the Fed policy shift.  Like everything else in the financial markets, Fed policy and minutes can be looked at from two angles: The crowd view and the contrarian view.  We already know the crowd view: buy buy buy.  The contrarian view would include looking just one layer below the surface of yesterday’s release.  The committee stated that given recent “global economic and financial developments and muted inflation pressures,” that they would be patient in their future rate adjustments.  The key word in that direct quote was “financial”.  The word implies that the Fed was largely focused on the the faltering stock market when it decided to offer up some reassurance. While the Fed was successful in turning a bad situation into a better one, backstopping financial markets is not included in their duel mandate of controlling inflation and maintaining low unemployment.  It is no secret however that the Fed has historically been a silent partner to the equity markets.  The challenge however is that they cannot explicitly and consistently prop up the markets, which have already enjoyed a respectable recovery at their hands with the S&P500 having risen just over +11% in 2019 alone. Given that many analysts, based on guidance, believe corporate earnings growth will be significantly lower, if not flat in the later part of the year, it is incumbent on investors to be cautious in their decisions. Now that “financial” risks appear to be behind us and US economic data continues to be on or above average, the Fed may find itself under pressure to resume rate hikes.  Not a likely scenario for 2019, but certainly a possible one.


We have a number of economic releases this morning starting with the shutdown delayed Durable Goods Orders number from the US Census Bureau.  Durable Goods Orders are expected to have risen by +1.7% in December versus the month’s growth of +0.7%.  Ex-Transportation, Durable Goods are forecast to have grown at +0.3 versus last month’s -0.4%.  Later this morning, we will get Manufacturing PMI which is expected to come in at 54.8, down slightly from last month’s 54.9.  The Services PMI is expected to be at 54.3 versus last month’s 54.2.   This morning we will get pre-bell earnings from Hormel, Newmont Mining, Norwegian Cruise Lines, and Dominos Pizza, amongst others.  After the bell releases will include Intuit, Hewlett Packard Enterprise, and Kraft Heinz.

daily chartbook 2019-02-21

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