Watchful Waiting

Watchful waiting.  Former Fed Chief Janet Yellen’s prescription for policy is in line with the current Fed and traders are obedient, watching and waiting for first quarter earnings.  Stocks closed up yesterday on a benign inflation figure and market friendly FOMC minutes.

WHAT YOU NEED TO KNOW:

1)  Rates are on hold for now.  Yesterday’s release of last month’s FOMC meeting minutes confirmed that Fed governors were in strong agreement that rates should remain stable for the year.  The minutes also made no overtures that rates would be lowered either, crushing the hopes of the growing “lower rates now” movement, which recently got a new supporter in Vice President Pence. Fed members continue to be worried about a slowdown in global economic growth, Brexit fallout, and US Chinese trade relations.  All of these gleanings are in line with what we have been hearing from Jay Powell and his team.  Former Fed head Janet Yellen weighed in on policy in an interview yesterday and she too stated that putting rates on hold is prudent.  She called for “watchful waiting” and said that a rate cut at this point would not be advisable.

2)  Prices are under control.  Yesterday’s consumer price index numbers came in slightly higher than expected with a year over year growth of +1.9% compared to last month’s figure of +1.5%.  The CPI excluding food and energy ticked down slightly to +2.0% from last months +2.1%.  The numbers are right in line with the Fed’s target and the growth in the top line CPI is likely due to recent rises in fuel prices.  The Fed can continue being patient for now.

3)  Brexit may happen… eventually, just not now.  WHILE YOU SLEPT the EU granted Britain an extension for their breakup giving them until October 31st to work things out.  PM Theresa May must now return back to Westminster and sell the extension to lawmakers who are not likely to be happy with the extended delay.  The Fed is concerned with Brexit implications, the US equity market does not seem to share the Fed’s concern.

THE MARKETS:

Stocks broke their two day losing streak yesterday propped up by positive spirits, in-line inflation figures, and confirmation that the Fed is on hold for 2019.  The S&P500 now rests just 1.4% below its all-time high achieved last September as we roll into first quarter earnings season.  It is important to note here and now: earnings matter.  The market friendly Fed saved the day with its policy shift carrying equities out of their 4Q18 slump to where we are today, it will now take a strong earnings season to propel us forward.  A word on that.  With all of the negative guidance that was delivered in last quarter’s earnings releases, analysts have pretty aggressively lowered their targets for 1Q earnings.  Analysts don’t like to be wrong, especially on the downside prompting them to usually set conservative earnings targets.  What that means is that earnings this season will feature lots of estimate beats, so the real metric to watch for is earnings growth and, of course future guidance. Stocks rose yesterday with the S&P500 climbing by +0.35%, the Dow Jones Industrial Average (held back Boeing… again) rising by a scant +0.03%, the Russel 2000 pulsed up by +1.4% (now back over its 200 day SMA), and NASDAQ 100 traded up by +0.57%.  Bonds traded up for a second day in a row and the ten year yield to maturity settled at 1.46%, down -4 basis points.  The 3 month / 10 year yield curve flattened out by 4 basis points to +4 basis points.  Yesterday, an EIA petroleum report showed a tightening of the energy market, supporting the recent strength in crude oil prices.  WTI crude prices rose +0.98% for the day closing at $64.61 / barrel.

WHAT TO LOOK FOR TODAY:

This morning we will get the producer price index from the Bureau of Labor Statistics.  Year over year PPI is expected to show a +1.9% growth flat to last month’s +1.9%.  The PPI excluding food and energy is expected to have grown at +2.4% year over year, down from last month’s +2.5%.  We have a Fed speaker bonanza today with Clarida, Williams, Bullard, Kashkari, and Bowman spread out through the day.  Kashkari will actually host a twitter Q&A session (Twitter is not just for presidents). The Treasury will auction $16 billion 30 year bonds which will prompt more discussion around Aramco’s recent mega bond offering.

daily chartbook 2019-04-11

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