Rate-cut Fever, Part 2

Rate-cut fever, part 2.  Yesterday, stocks surged for a second day as investors continued to celebrate Chairman Powell’s awkwardly worded Tuesday speech.  Stock traders were looking for reasons to buy stocks and they found it in the Fed.

 

MY TWO CENTS

 

1.  Investors are really, really counting on a Fed rate cut. If Tuesday’s bullish market action wasn’t enough, investors were treated to a second day of positive moves, albeit more subdued, stimulated by hopes for a rate cut.  I mentioned in my note yesterday that the Chairman’s wording did not appear to signal a real departure from the Fed’s earlier stance and many analysts seem to be voicing a similar warning.  While it is clear that there are economic headwinds that are caused by the trade conflicts, which now include an increasing list of players, the Fed cannot be too reactive and they typically take a longer-term view.  For example, tariffs may retard economic growth but they can also cause inflation as increased costs of goods make their way into consumer prices.  If the Fed acts too quickly they run the risk of causing inflation.  Lest we forget that the Fed’s dual mandate includes keeping inflation under control and ensuring employment remains robust.  Based on those mandates, the current Fed policy seems like it is working quite well.

 

2.  The tariff madness continues.  Last night WHILE YOU SLEPT, delegates from the US and Mexico ended their discussions with no agreement, increasing the likelihood that the 5% tariff will actually take effect on June 10th.  As usual, there were mixed messages and tweets that followed, giving investors very little to hang onto.  Delegates extended talks to be continued today: positive, the President said that “not nearly enough progress was made”: negative, and a Presidential tweet that read “The higher the tariffs go, the higher the number of companies that will move back to the USA!”: negative.  The average hourly wage in Mexican manufacturing is about $2.50 versus $22.04 in the US, making it not at all clear how raising tariffs could possibly incentivize manufacturers to shift their production to the US.  Meanwhile, Stephen Mnuchin announced yesterday morning that he will be heading to China this weekend to hopefully advance stalled trade talks ahead of the G-20 meeting scheduled for later this month in Japan.  Markets viewed the announcement positively.

 

THE MARKETS

 

Stocks had another positive trading day as investors took a second helping of potential Fed stimulus.  Before the bell the ADP Employment Change number came in at 27 K, far below expectations.  Typically a number that far off would be perceived as a negative for stocks and the economy… unless investors view the bad news as another reason for a Fed rate cut, which is exactly what happened.  Yesterday, bad was good and stocks advanced with the S&P500 climbing by +0.82%, the Dow Jones Industrial Average trading up by +0.82%, the Russell 2000 slipping by -0.12%, and the NASDAQ 100 surged by 0.76%.  Crude Oil fell by -3.37%,  slipping into bear territory on news that supplies are growing.  Bonds slipped slightly yesterday and the 10-year treasury yield climbed by +1 basis point to  2.13%.  The 3-month/10-year yield curve closed out its 10th strait session inverted at -20 basis points.

 

WHAT’S NXT

 

– The US Census Bureau will announce Trade Balance which is expected to show a slight increase in the deficit from -$50.0 billion to -$50.7 billion.

– Weekly Initial Jobless Claims are expected to come in at 215 k compared to the same figure last week.

– Dallas Fed Chief Robert Kaplan and New York Fed President John Williams will both speak today.

– Ciena Corp., J M Smucker, and Michaels will announce earnings before the bell while DocuSign along with now-famous-recent-IPO-phenoms Zoom Video and Beyond Meat will announce after the bell.

daily chartbook 2019-06-06